Russia's oil and gas reserves are just too big for the world's oil companies to ignore, says Wood Mackenzie senior analyst, Russian and Central Asia energy research, Hilary McCutcheon.

Those that supply European consumers in particular cannot. But just how willing are they to deal with the political and financial control Russia has over its reserves? Apparently, quite willing.

Contract negotiations with Russian authorities are part of the "long game" of dealing with Russia, McCutcheon says. Many companies are willing to ride out the tough times in the hopes of gaining good reputations in the region and getting access to more deals down the line.

Many U.S. companies set up shop in Russia during the low-priced oil days of the 1990s, when the former Soviet Union was trying to stabilize its economy and anxious for foreign investment. Foreign companies showed up with blank checks ready to buy assets, but with the growing power of its state-owned hydrocarbon companies, Russia can now better dictate the terms of deals, McCutcheon says.

"It's not always in the (foreign) companies' control," she says. "They can't just say, 'I like that field.' Now it's, 'I'm here, and here are my strengths.'"

Russia's tax regime receives criticism, but McCutcheon says many of the contracts were written specifically in a time when the country was not anticipating higher oil costs, and the taxes being levied on joint-venture partners are now kicking in because profits from oil production have risen as well.

Companies were willing to take a 12% return at $12 to $15 oil, but now they find themselves in the top tax bracket.

On the matter of European gas supply, McCutcheon says Gazprom may try to float ideas, such as a gas pipeline to China, but it is merely hedging its bets. Any attempt to starve out Europe in exchange for increased power would be foolish on Russia's part.

Russia is also trying to completely control much of its own assets, with Total SA being knocked out of the Vankor oil project in northeastern Siberia. TNK-BP is maintaining its status quo, while also seeking to dump its fringe assets.

Investors shouldn't expect a repeat of the controversy concerning the acquisition of Yukos' assets any time soon, she adds, since no company seems to have any executives with political aspirations conflicting with those of the Kremlin.



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