Financing upstream oil and gas ventures in the transitional economies of the former Soviet Union

: a study of foreign investment and associated risks

  • Andrew Benjamin Seck

Student thesis: Doctoral ThesisDoctor of Philosophy

Abstract

The development of the Foreign Oil and Gas Investment (FOGI) Database permitted a systematic study of all reported upstream projects involving foreign investors throughout FSU, in order to assess the reaction of western capital to the opening up of the FSU's oil industry. While we identified 292 upstream projects either under discussion or development and representing a potential investment of $231 - $308 billion, there is a wide dichotomy between the high level of interest and the low level of investment incurred. It is misleading to assess potential levels of investment in the FSU in isolation of global upstream investments which are estimated at $106 billion per year over the next decade. Of this amount western IOCs are expected to contribute approximately $55 billion per year. The challenge for the FSU is to attract its share (or increase its share) of global upstream capital expenditures. The latter implies a transfer of productive capacity from elsewhere in the world.International efforts vis-ä-vis the World Bank, IFC, EBRD, OPIC and various export credit agencies have failed to inject substantial credits into the FSU's petroleum industry. Disbursements remain slow and their claimed catalytic role appears to be overstated. As the FSU ranks very poorly on a scale of political/country risk, western commercial banks
remain wary of extending credits. We believe the rejuvenation of the FSU's oil industry, particularly outside Russia, is pre-conditional upon the involvement of the `Major' IOCs who possess the requisite capital and technology to initiate the necessary projects. But, our research indicates that IOCs are pursuing a cautious policy of self-financing and staggered development. Thus the real onus of financing lies with the host-governments to provide the economic, legal and fiscal environment which will permit these projects to earn sufficient profits for reinvestment. Should such conditions be created in Russia, where a large domestic oil industry already exists, then the domestic industry would likely contribute a large portion of the needed investment as they would themselves be in a position to reinvest their own earnings. There is a strong correlation between levels of potential FDI and the location of known reserves as IOCs seek to minimise geological risk. In Central Asia and the Caspian Sea region where $55 - $75 billion in potential upstream investments have been reported, transportation uncertainty is singled out as the most critical impediment to growth. There
are no realistic alternatives to the construction of new pipeline capacity which will act as the ultimate regulator of foreign upstream investment. For the time being large volumes of western investment capital remains cautious and beyond the reach of the FSU's petroleum industry.
Date of Award2012
LanguageEnglish
Awarding Institution
  • University of Dundee
SupervisorThomas Walde (Supervisor)

Cite this

Financing upstream oil and gas ventures in the transitional economies of the former Soviet Union: a study of foreign investment and associated risks
Seck, A. B. (Author). 2012

Student thesis: Doctoral ThesisDoctor of Philosophy