Foreigners in the Russian petroleum sector: the cases of Sakhalin-II and TNK-BP

Abstract

This thesis is an attempt to better understand the sometimes tumultuous relations between international oil companies (IOCs) and the Russian state by examining conflicts over regulatory practices and the enforcement of environmental regulations, and their interpretation in the Western media. This research focuses on two cases, one involving Royal Dutch Shell, the majority owner of company Sakhalin Energy, and the other involving BP’s Russian joint venture, TNK-BP. The two cases were selected as windows on the changing relationship between the state and IOCs in Russia during a specific political era – the first two presidencies of Vladimir Putin. This was also a period during which oil prices rose steadily and remained at historically high levels. Such periods tend to strengthen the hand of oil-producing states and strain their relations with IOCs.

Sakhalin Energy is the operator of the Sakhalin II project, and was until December 2006 controlled by Shell and later by the Russian state company Gazprom. TNK-BP was the main owner of the Kovykta natural gas field which was central to the conflict – initially between the Russian authorities and a united TNK-BP and later on between the Western and Russian shareholders in TNK-BP. In the cases of both BP and Shell, the Russian authorities accused the IOCs of violating formal regulations, such as environmental regulations.

The sanctions that the Russian authorities imposed on the IOCs and their motivations for doing so were the subject of extensive discussion among IOCs, other Western actors and the Western media. This dissertation aims to find out how Western actors such as the media and IOCs understand the rules of the game in Russia, relating it to Alena Ledeneva’s work. Ledeneva (2006) outlines a framework explaining the enforcement of regulations and regulatory practices in Russia and their use and abuse for informal purposes. Her main point is that law enforcement practices in Russia differ from those in the West because in Russia regulations are often used selectively and manipulatively for purposes unrelated to the actual legal dispute. Ledeneva’s framework is written from a Russian perspective, assuming that Russians understand law enforcement and regulatory pressure in Russia as selective and manipulative. The lack of respect for the law among the Russian public, in combination with the great difficulty of complying with the complicated legal framework, results in a situation in which the law can be used against anyone at any time. The two cases analysed in this dissertation are clear examples of this phenomenon. On the background of shortcomings in Russia’s legal and regulatory system, such as incoherency and the use of informal practices to bypass complicated formal procedures, the Russian authorities were effectively able to pressure Shell and BP into giving up control over major oil and gas projects.

The analysis of both conflicts shows that regulatory pressure on Shell and BP increased gradually, until both companies ultimately gave in, resulting in a reduction or take-over of their shares in oil and gas projects by Gazprom. It also shows that both companies actively involved the public in their conflicts with the Russian authorities by launching public debate emphasizing the negative aspects of the investment climate and the impact on foreign investment in Russia, in unsuccessful attempts to put counter-pressure on Russian policy-makers. The storylines in the Western media made clear these negative impacts by stressing how the enforcement of formal regulations in Russia is driven by ulterior motives. However, uncertainty remains as to whether these storylines were the direct result of the influence of BP and Shell and their strategies towards the Western media.

Both Shell and TNK-BP clearly understood that the core issue was not the violation of environmental regulations or licence agreements, but competing interests in large-scale oil and gas projects. Both companies faced situations in which full compliance with the formal rules was impossible due to the shortcomings of the law itself. For Shell, compliance with the regulations would have meant violating the company’s own environmental action plan. Similarly, complying with the licence agreements of the Kovykta field was impossible without the approval of gas exports to China from the field.

Both Shell and BP appeared to understand Russian society as Ledeneva stipulates that it works, as a system of interconnected formal and informal levels in which the informal level is dominant. However, their strategy of challenging the authorities within this system by publicly pressuring them indicates that they either still failed to understand the system fully, or misread the policy shift towards foreign companies in the petroleum sector, or overestimated their own strength. Most likely it was a combination of these misconceptions that got the two companies entangled in protracted conflict. Moreover, Western actors forgot an important lesson that has been repeated many times in the past around the world: when oil prices rise, oil-producing states tend to lean forward and IOCs need to be prepared for tough negotiations.