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Facing hard-to-get oil, Russia seeks U.S. help

The record-breaking budget behind the flashy 2014 Winter Olympics in Sochi sends a clear message to the world: In Russia, go big or go home.

The same motto could apply to the country's oil and gas sector, which is dominated by a few companies including OAO Gazprom, OAO Lukoil and OAO Rosneft.

But as these oil giants eye complex unconventional crude reserves and deepwater Arctic oil fields, they may need help from U.S. explorers who have traditionally shied away from Russia's notoriously insular energy sector.

"Russia is looking for technology -- only investment is not good enough," said Sergei Millian, president of the Russian-American Chamber of Commerce, a nonprofit that promotes business between Russia and the U.S. "What we're talking about is truly high-tech technology that can be applied in the difficult-to-get Eastern Siberian oil and gas fields, as well as in the Russian Arctic -- those very deep, frozen waters."

The Russian-American Chamber is bringing a delegation of U.S. executives to a major oil and gas forum in Moscow next month, where the business group hopes to foster new "multibillion-dollar" energy deals.

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"With the current technology that Russians possess, it is impossible to deliver the results that are needed," Millian said.

Oil and gas profits account for more than 50 percent of Russia's federal budget, according to the U.S. Energy Information Administration.

Despite stagnant production figures and the government's heavy reliance on oil revenues, Moscow is hardly ready to hand off the keys to its energy sector. Russia produced an average of 10.5 million barrels per day of liquid hydrocarbons through September last year, topped only by the U.S. and Saudi Arabia.

But just as the Sochi Olympics have been plagued by relatively minor mishaps, the devil's in the details for Russia's oil sector as it turns to unconventional tight oil formations.

"The Russians are at their best with something huge like Sochi," said Thane Gustafson, senior director of Russian and Caspian energy for IHS CERA and a political science professor at Georgetown University. "In a sense, it's the same thing with oil -- they do Big Oil very well, and the question is now: Is tight oil turning out to be something you can do in that Big Oil, big company, big Russian way?"

So far, that has been the Kremlin-backed approach. In December, Rosneft and Exxon Mobil Corp. finalized a joint venture to exploit tight oil reserves in Western Siberia, with Exxon providing up to $300 million through 2015.

"Developing tight oil reserves in Western Siberia is becoming increasingly important for the company and the country in general, as it will boost oil production volumes in Russia," Rosneft's President Igor Sechin said of the deal, according to a statement on the company's website.

Exxon and Rosneft have also collaborated in Arctic exploration, but lately tight oil and its corresponding technologies such as hydraulic fracturing and horizontal drilling "have seized the Russians' imaginations," Gustafson said.

Gazprom's oil branch Gazprom Neft launched a drilling blitz in the untapped Bazhenov oil formation last month, drawing on the technical expertise of partner Royal Dutch Shell PLC. Banking giant Barclays PLC has deemed Siberia's Bazhenov the biggest shale resource in the world (EnergyWire, June 5, 2013).

Despite the size of the prize, some companies have balked at entering Russia due to ongoing concerns about the rule of law and political tensions with the U.S.

Gustafson said the "big challenge" for Russia will be attracting the small to medium-size companies that have propped up the U.S. domestic energy boom with their willingness to take risks. More than 95 percent of Russia's oil production comes from outsize players like Lukoil.

"This international conference that's coming up [in March]-- one of the big things to watch will be whether the smaller players show up, because the Russians don't have smaller players of their own; they gobbled them all up."

Changes in store?

Critics say the National Oil and Gas Forum is doomed to fail given Russia's checkered history of variously welcoming, intimidating, ousting and dismantling domestic companies or even foreign-owned subsidiaries operating in the country.

Bruce Misamore, former chief financial officer of now-defunct energy giant Yukos, described how the company's forced bankruptcy soured his view of Russia. The state-led dissolution in the early 2000s was allegedly orchestrated by Russian President Vladimir Putin to dispose of political rival Mikhail Khodorkovsky, the former Yukos CEO who was released from Russian prison this December.

"There really are three things holding Russia back in addition to the overhanging expropriation of Yukos -- and that's corruption, lack of an independent judiciary and lack of a rule of law," Misamore said in an interview from Houston, where he is now fighting on behalf of former Yukos shareholders to reclaim contested assets. "Until Russia solves those three problems, they're not going to get much foreign investment.

"If you can get in, make a lot of money and get out with a very short payback horizon, maybe you can get out and do something, because the resources are certainly there," Misamore said. "But if you ever run into problems in Russia, there is no way to protect yourself."

Responding to accusations of corruption, Millian of the Russian-American Chamber noted that any major energy deals require direct, over-the-table approval from Moscow.

Based on conversations with the Russian government, Millian said "they're interested in making the changes to make [the oil sector] more attractive for American companies," including simplifying Russia's oft-incomprehensible fiscal tax regime. "They are opening their doors for the American energy companies' leaders."

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