The strategic alliance announced Monday between Royal Dutch Shell and Rosneft represents a thinly veiled kowtow by a Western oil giant of yesteryear to the fast-rising Russian champion of today.
The deal, signed by Shell Chief Executive Jeroen van der Veer and Rosneft chief Sergey Bogdanchikov, did not involve any specific projects and mentioned no dollar values. Ultimately it is little more than a vague agreement that Shell is willing to put up its billions to buy into Rosneft's big new projects, everything from drilling oilfields to building refineries and operating gas stations.
So why is this coming now? Well, it's been a particularly bad several months for Western oil giants in Russia, and Shell is trying to get back in the Kremlin's good graces.
Shell is desperate to show any kind of progress in Russia. Early this year, it was forced to sell half of its Sakhalin 2 stake to Gazprom. In 2005, Shell had disclosed $10 billion in cost overruns on the $20 billion project. Shell's van der Veer told Forbes in a 2006 interview that before the overrun was made public, it fell to him to call the Kremlin to relay the news. Russian President Vladimir Putin later castigated Shell publicly over project mismanagement.
Since then, Putin has moved to strengthen state-controlled oil giant Rosneft and its natural gas brother Gazprom and project their power worldwide. Putin in late June even laid Russian claim to vast stretches of oil-rich subsea geology in the Arctic Ocean.
If Shell is going to maintain its ranking behind ExxonMobil as the world's No. 2 oil giant, it will need to remake some friends in Russia.
Rosneft is the place to do it. Rosneft's chairman is Igor Sechin, deputy chief of staff to Putin.
Sechin, over five years, has transformed Rosneft from a loose assemblage of oil assets into Russia's giant. Rosneft has made a nearly clean sweep of major Yukos assets in the auctions that just finalized that company's liquidation.
In May, both Shell and BP (nyse: BP - news - people ) bid in one of the last auctions for a chain of 500 gas stations and storage facilities across Russia. They were outbid by Unitex, a relatively unknown company that grabbed the assets for roughly $500 million.
In June, Unitex turned around and sold the package to none other than Rosneft--for a $100 million mark-up. Someone got very rich at Unitex (which some press reports speculate is linked to Gazprom). Shell and BP didn't have a chance.
Likewise, don't expect Shell to accrue much benefit from this new Rosneft allliance, especially if history is a guide. In 1997, Shell's van der Veer, then managing director, inked a similar strategic alliance with Gazprom. That didn't turn out so well.
But the real chin-scratcher came in 1998, when Shell backed out of a consortium set to pay $1.6 billion for 75% of Rosneft. Van der Veer claimed soft oil prices for the reason behind that one. Ahh, hindsight. Today, proved reserves are 19 billion barrels, and with output of 2 million barrels a day, Rosneft trails only Exxon Mobil, BP, Shell, Chevron , Total and ConocoPhillips in output among publicly traded companies.
But Shell's not alone. In June, Russia forced BP-TNK to sell its 63% stake in Siberia's 2 trillion-cubic-foot Kovykta gas field to Gazprom for some $800 million, on the grounds that it wasn't selling its contractually obligated volumes out of the field. But selling those volumes was impossible because BP-TNK was barred access to Gazprom's export pipelines.
And within days of taking over Kovykta, Gazprom set its sights on Exxon Mobil, which has a contract in place to export gas from its Sakhalin 1 project to China. Moscow has recently been threatening environmental regulations as a way to force Exxon to tear up its deal with China National Petroleum and sell the gas to Gazprom. Why? So Gazprom can monopolize Russian gas exports to China and dictate pricing. If Exxon doesn't go along, it can expect the same fate in Sakhalin that befell Shell.
Putin is said to be interested in taking over chairmanship of Rosneft from Igor Sechin when his term ends next year. For Shell, a pledge of its billions now could give it a better chance at holding a place in Putin's heart for a very long time to come.
