Can Big Oil Survive Russian Roulette?

Even if your investment portfolio contains just a smattering of energy names, I hope you're at least eyeing, and maybe even working your way through, Daniel Yergin's hot-off-the-press The Quest: Energy, Security, and the Remaking of the Modern World. After having perused the readable and informative work, your understanding of today's "quest" for most forms of energy will be expanded dramatically.

The Quest comes precisely 20 years after Yergin's prize-winning The Prize: The Epic Quest for Oil, Money, and Power, whose reception obviously had nothing to do with its title. I can't predict the composition of the author's next energy book. Neither, I'm certain, can he, even as the co-founder and chairman of Boston's Cambridge Energy Research Associates. But I'll hazard a guess that the next book will be available in far fewer than two decades and that the events of just the past few weeks will virtually guarantee that it will deal with dicey and dangerous geopolitical occurrences.

Energy skirmishes ahead
Specifically, I'm willing to wager that those occurrences stand an excellent chance of involving oil- and gas-related contretemps between the U.S. and Russia. It's no secret that, especially during the past dozen years, with the ascendency of Vladimir Putin -- first as prime minister and then as president of the nation -- Russia has, with assistance from the likes of ExxonMobil (NYSE: XOM  ) , Royal Dutch Shell (NYSE: RDS-B  ) , and even BP (NYSE: BP  ) , become a major factor in the world's production and distribution of oil and natural gas.

Indeed, following lengthy service as a KGB operative in East Germany, and after a brief stint in the government of his hometown, Leningrad -- now St. Petersburg -- Putin undertook work on the Russian equivalent of a Ph.D. in economics. At the time, 1997, Russia had defaulted on its debt and was technically bankrupt. Thus, Putin was to benefit from a timely dissertation that recommended maximizing the production and export of the nation's natural resources.

It was a fine and pragmatic thesis -- or it would have been, had it not ultimately been discovered that it plagiarized a book written by two professors at the University of Pittsburgh. This was unbeknownst to Russia, however, and so just as oil prices began a recovery from the doldrums of the late 1990s, Putin was appointed prime minister in August 1999. And with events changing rapidly in the country, by March 2000 he had been elected Russia's president.

Timing is everything
There are two essential elements you should be aware of regarding Putin's presidency. The first involves the tremendous growth in Russia's energy resources at a time when prices were recovering steadily. By 2009, the country was producing 9.9 million barrels of oil a day, while it consumed less than 3 million barrels, thereby resulting in healthy export profits. Similarly, its estimated 1,680 trillion feet of natural gas moved it atop all the world's gas-producing nations, with the lion's share of its product finding its way to the Commonwealth of Independent States, the EU, Turkey, and Asia.

Further, as was detailed in Wellesley professor Marshall Goldman's 2008 book Petrostate: Putin, Power, and the New Russia, Putin was not one to treat even high-level Russians with kid gloves. At a time when the state-owned Ministry of Petroleum Industry was being dismantled into separate private oil companies, a number of the managing oligarchs were forced to leave the country hastily, having watched their newly privatized assets face seizure by Putin's henchmen.

Perhaps best known is the fate of Mikhail Khodorkovsky, who had taken over the assets that became Yukos, a giant oil company. Khodorskovsky saw his assets seized and turned over to state-run Gazprom, Russia's largest company. He was then hauled off to prison, where he may languish for a lifetime.

Today's Russian energy world
Russia today is seeking to explore for oil and gas and add to its infrastructure in geologically, technologically, and climactically challenging areas, such as its offshore Arctic and the Black Sea. And yet its equipment and expertise are insufficient for undertaking those efforts singlehandedly. As such, its generally state-controlled entities have recently entered into joint venture agreements with such companies as ExxonMobil, Italy's Eni (NYSE: E  ) , and Total (NYSE: TOT  ) .

At the same time, however, Russia has just passed an important inflection point: Putin has served as the country's prime minister since 2008, when term limits required that he step down from the nation's presidency. Now, having nearly completed a required stint on the sidelines, he has recently tossed his ushanka (a Russian "ear cap") into the ring, signifying an effort to retake the presidency in 2012. If he's successful, he'd replace his own hand-picked successor, Dmitry Medvedev, who, in the ultimate game of political leapfrog, would likely replace Putin as prime minister.

Will President Putin put us in a pickle?
Assuming that the exchange works out as expected, we in the West shouldn't be shocked at being beset by a pair of issues: Especially during Putin's earlier stint as president, the Western oil companies were victimized by all manner of roughhouse treatment by Russian authorities. Shell, for instance, was stripped of its operating position on remote Sakhalin Island, with its related assets subject to a forced sale to Gazprom for a bargain-basement price.

In fact, only ExxonMobil has managed to contend consistently with Russian authorities' mischief. And while tranquility has increased somewhat under Medvedev, I'd anticipate that Putin's resumption of the nation's top spot could easily bring about a resurgence of less-than-cordial unpredictability.

Indeed, after signing a partnership agreement with Rosneft earlier this year involving exploration of the Black Sea, Chevron (NYSE: CVX  ) thought better of the financial terms and the geological interpretations and begged off the deal. At about the same time, ConocoPhillips (NYSE: COP  ) jettisoned its 20% stake in Russia's Lukoil. While the Houston company had been unloading other assets, the sale of its Lukoil position likely indicated concerns on Conoco's part about the staying power of the Russian relationship.

Another Soviet conglomerate?
Perhaps even more daunting as he appears destined to return to the presidency is Putin's desire -- revealed less than two weeks after his latest nomination -- to form a "Eurasian Union" comprised of former Soviet nations. His apparent notion is that the organization would become "one of the poles of the modern world," rivaling the U.S., the EU, and China and its neighbors. The suggestion initially has met with little support, but has engendered concern about a resumption of the Cold War. Nevertheless, Putin's record of typically gaining his way dissuades me from discarding his notion entirely.  

So, if the past is indeed prelude, it's reasonable to assume that only ExxonMobil may benefit from both its new joint venture in Russia and the pending changes in that country. In fact, until convinced otherwise, I suggest that Fools with a propensity for energy -- which should be most of us -- give the biggest of Big Oil a position on their Fool Watchlist.

Motley Fool newsletter services have recommended buying shares of Chevron and Total. Try any of our Foolish newsletter services free for 30 days.

 We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies named above. The Motley Fool has a disclosure policy.


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