Russian Oil Is Up For Grabs - Who Will Take Advantage Of It?

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 |  Includes: BP, CVX, HAL, RIG, SDRL, STO, TOT, XOM
by: Jacob Steinberg

The Northern shores of Russia are believed to hold massive amounts of high quality oil yet to be discovered. Recently, Vagit Alekperov, CEO of Lukoil, the largest oil company in Russia announced that the Russian government is looking for offers from the multi-national oil companies to discover, extract and develop its oil in the Arctic. This offer is likely to attract multiple companies in the near future. The only condition the Russian government has is that the oil company should have the technology and tools required to extract oil under extremely harsh conditions.

The Russian government and many big oil companies are banking on the idea of extracting oil from this part of the world, however, it can be very costly and dangerous in multiple levels. First of all, the area is extremely cold most of the year, and daylight is nearly non-existent for half of the year. It would require a high level of technology to go after oil in this geography, and this is the exact reason the Russian government needs help from multi-national oil corporations. It would take billions of dollars of investments to get these oil fields up, functional and profitable.

This task is also dangerous because the Russian government wouldn't be at the top of anyone's trustworthy list. One example is BP. Until last year, the Russian government had a good relationship with the company, but things have been rocky since then. Last year, BP's deal with the Russian government fell through suddenly and the company's offices were stormed by the Russian special forces that are usually used in operations related to terrorism. Of course, no one got hurt as this was a pure demonstration of power by the the Russian government.

One major player that comes to mind is Exxon Mobil (NYSE:XOM). In 2011, the company already committed to helping Russians extract oil from difficult parts of the country. Exxon will invest a large amount of money in Russia, however, the exact amount is not yet known as it will depend on the scope of projects.

Another important player could be Statoil (NYSE:STO). This company is experienced in discovering and extracting oil in harsh conditions as it mainly operates in Norway. The company is also looking for alternative oil reserves as the reserves in Norway have been diminishing.

Alternatively, Total (NYSE:TOT) could be interested. Recently Total signed a partnership with Russian OAO Novatek to take over Yamal LNG in order to explore and develop oil and natural gas in Russia. Total is also looking for new oil fields.

Earlier this month, Chevron (NYSE:CVX) held talks with the Russian government in order to ask about the oil prospects in the arctic. The company openly announced its interest of seeking oil in the area.

There will be probably other companies to benefit from Russian oil as well. For example SeaDrill (NYSE:SDRL), TransOcean (NYSE:RIG), Halliburton Company (NYSE:HAL) may benefit greatly from these projects as these companies offer services and tools for oil companies to extract oil in the offshore.

I am still skeptical about trusting the Russian government though. Exxon already learned its lesson when its assets were nationalized in Venezuela and the company is generally known to be very conservative about risk taking. If Exxon thinks the Russian government is a safe bet, chances are it is for now. However, this might also be a sign of desperation for the oil companies who are having significant amount of trouble finding new good quality oil reserves.

Looking at this from Russians' side, they don't want their vast oil reserves to just sit there and they want to turn those reserves into cash flow. So far, Russia lacks the technology and funds to extract oil from northern parts of the country and it has to rely on the multi-national corporations to get the job done.

For investors, this may create opportunities as well as new risks. If the Russian government doesn't interfere with the process or try to nationalize the assets of the companies involved, those companies can profit greatly from extracting oil in Russia. In this case, both risk and returns are high for the oil companies and their investors.

Disclosure: I am long BP, XOM, TOT, CVX.