The Changing Structure of the Russian Oil and Gas Sector the Response of Western Investors *

The structure of the Russian oil and gas sector has changed dramatically in the last two years. The first step was the consolidation of the majority of Russia's upstream and downstream companies and associations into vertically integrated companies (VICs). The second step was the acquisition, initially through loans for shares schemes, of controlling interests in some of the larger VICs by major banks. This has resulted in the creation of extremely powerful industrial groupings and radically altered the strategy and management philosophy of the component production and refining associations. The VICs are gradually taking over the trading functions previously carried out by independent registered exporters and relationships are changing with the transportation monopoly, Transneft, which has itself devolved some of its powers to the Federal Energy Service. Gazprom is also changing and has recently been obliged to open its gas pipeline network to third party users. As the production sharing legislation slowly works its way through parliament, the industries’ goals have undergone a subtle change; whereas, at inception, the primary objective was to create a legal and fiscal framework to encourage inward investment from western oil companies, latterly the main emphasis has been on encouraging domestic investment by improving the tax regime for selected components within the VICs. The growing strength of the VICs is steadily improving their prospects of raising direct equity and debt finance in the West. This, in turn, reduces the need and hence opportunities for major western operated new projects, except in fields with extreme technological and environmental challenges, where they may still be welcome.