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Russia Touts Gas Deal at St. Petersburg, but Who’s Listening?

More U.S. executives are no-shows at Russia’s big economic conference, and even the locals grumble about the need for reforms.

Russian officials opened the St. Petersburg International Economic Forum on Thursday looking to reaffirm their country’s status as a raw-materials superpower that can withstand attempts by the U.S. and the European Union to isolate it over its policies in Ukraine.

Moscow’s self-confidence was strengthened by an estimated $400 billion, 30-year natural-gas supply deal reached with China on the eve of the forum. Russia and China also inked dozens of other agreements during President Vladimir Putin’s two-day visit to Shanghai, ranging from new bridges across their various borders to a $500 million investment by China’s Great Wall Motors Co. in Russian auto assembly. “What happened in Shanghai was a qualitative change, a turning point,” deputy economics minister Alexei Likhachev told a panel at the forum, the country’s signature economic and business gathering.

But optimism was not universal, even among the Russian leadership. Likhachev’s own boss, Economic Development Minister Alexei Ulyukayev, poked fun at government inefficiency and red tape during a separate panel. “We say we are reforming the tax system, then it turns out that is not exactly so,” he said. “We say we want to help small business, but actually, we weigh it down with more regulation.”

Some Russian executives on hand echoed this theme more passionately. “I spent my visit to Asia thinking about one number,” said Ruslan Alikhanov, chief executive of Far Eastern Shipping Co., a logistics company whose main operations are in Russia’s Far East. “In Russia it takes 24 to 48 hours for one container of freight to pass Customs. In Singapore it takes 17 seconds.”

Foreign executives, meanwhile, turned out to be even more scarce on the ground than many had expected. Earlier this month the Obama administration urged American executives not to attend this year’s forum, and several CEOs ­— including such forum habitués as Goldman Sachs Group’s Lloyd Blankfein and PepsiCo’s Indra Nooyi — indicated prior to the event that they would not be coming. But the Global CEO Summit that kicked off the forum on Thursday was more notable for its absences. Robert Dudley, the CEO of oil giant BP; Grant Porter, vice chairman of Barclays Capital, and Daniel Pinto, CEO of JPMorgan Chase & Co.’s corporate and investment bank, were all no-shows, despite being billed as participants in the event program.

Neither Putin, who is scheduled to give the forum’s keynote address on Friday, nor state-owned gas giant Gazprom revealed the price China will pay under the new megadeal, leaving investors uncertain about its financial as opposed to political advantages. The two sides had been negotiating the pact for ten years, and they reportedly reached an agreement only at 4 a.m. Wednesday morning, Putin’s last day in Shanghai. Analysts in Moscow assume the price will be between $350 and $380 per thousand cubic meters of gas. That is comparable to what Gazprom charges European customers, but the company will have to spend tens of billions of dollars on drilling and new pipelines to get the gas to China.

“The basic price looks about break-even,” said Bernard Sucher, a board member at Aton investment bank in Moscow. “Whether it’s profitable for Russia will depend on a lot of details we can’t see.” Gazprom shares declined by about 2 percent after the deal was announced, after having risen 14 percent over the past month, at least partly in anticipation of the China breakthrough.

The agreement has undeniable strategic advantages for Russia, though. It ensures the country will be a key energy supplier for decades to come, and it should help reduce the nation’s dependence on Europe and provide a pivot toward Asia.

One private sector CEO backing up Likhachev’s enthusiasm for the new China opening was Maxim Sokov of EN+ Group, an electricity company controlled by Oleg Deripaska, billionaire CEO of aluminum giant UC Rusal and founder and principal owner of the mining and metals conglomerate Basic Element. Sokov accompanied Putin to Shanghai and came back with a deal of his own: a coal mining joint venture near Lake Baikal that, he told the conference, “will make it economical to send Russian coal to northern and western China.” He also envisioned extensive synergies between Eastern Russia’s rich hydropower resources and China’s rapidly industrializing interior, including direct export of electricity and hosting energy-intensive functions like “running data centers in Irkutsk Oblast.”

Energy officials played up Russia’s potential for continued dominance not only in gas but in oil, as well. The country holds the world’s largest reserves of shale oil, at 10 billion tons (some 73 billion barrels), according to the Energy Ministry. That compares with an estimated 8.5 billion tons in the U.S.

Executives from Russia’s big oil companies discussed prospects for a shale oil revolution in Russia that could mimic the explosion of production in North Dakota’s Bakken formation. Russian efforts to replace its dwindling conventional fields in Western Siberia have focused until now on the Arctic Ocean shelf and virgin territory in Eastern Siberia. But shale has the advantage that it can be drilled close to existing infrastructure in West Siberia.

State-owned flagship Rosneft is exploring the Bazhenov deposit, thought to be one of the biggest shale fields in the world, through a joint venture with Exxon Mobil Corp., said Eric Liron, Rosneft’s French director of drilling and development. He took the opportunity to point out that Exxon has assured its commitment to working with Rosneft even though the Russian oil company’s CEO, Igor Sechin, has been sanctioned by the U.S. government over Ukraine.

But Liron also cautioned against expectations of an easy repetition of U.S. success. “The USA does not have the same shale that we have,” he said. “It may be harder for us to find where the sweet oil is.”

Andrey Kuzyaev, president of Lukoil Overseas, also pointed out that Russia lacks the economic infrastructure that drove shale development in the U.S.: small, nimble wildcat drilling companies and a highly competitive oil field services sector. U.S. drillers can expect to spend $3 million to $3.5 million to explore a new well, but in Russia the cost can run as high as $20 million, he said. Altering that math is just one of the many challenges looming over Russia’s economic future.

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