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Oil and gas to grease cogs at Blair-Putin summit
By Tom Ashby

LONDON, June 24 (Reuters) - Russia's hunger for investment and Britain's thirst for energy imports will put oil and natural gas high on the agenda at Vladimir Putin's state visit to London this week, economists and officials said on Tuesday.

After two days of pomp at Buckingham Palace, the Russian premier will open an energy conference with Britain's Tony Blair on Thursday, where they will celebrate deeper integration in the strategic sector even if differences remain over liberalisation.

"Economic themes will be heavily slanted towards foreign direct investments in Russia," said Niclas Sundstrom, economic and political strategist at Citigroup.

"The comfort of the multinational corporate community with Russia is growing."

Britain became Russia's top foreign investor this year with landmark deals signed by energy giants BP and Royal Dutch/Shell headquartered in London.

For two of the world's top three oil companies, the agreements open up the world's biggest gas reserves and seventh largest oil reserves.

For Russia, BP's $6.75 billion tie-up with TNK brings Western management, technology and funds to the largely home-grown industry. Shell's $10 billion Sakhalin oil and gas venture will extend Moscow's reach in east Asia, capturing a huge slice of the fast-growing markets there.

The hydrocarbons from these deals will not flow directly to Britain, which is itself a big oil exporter, but London is already eyeing an energy deficit as the North Sea declines.

Britain's shortfall will be felt first in natural gas, and Russian state gas monopoly Gazprom plans to build a new pipeline to northern Germany, with a possible extension to Britain.

Russia, in turn, could seek Britain's help in securing oil deals in another country where Blair holds influence, Iraq.

In a BBC interview on Sunday, Putin said Russian companies should have a fair chance for contracts in Iraq, where Lukoil once held the prized $3.7 billion West Qurna development deal.

That contract was cancelled by the government of Saddam Hussein shortly before the U.S.-led war began, but other contracts could still be valid and some huge untapped oilfields are still to play for.

"Of course we will be insisting that some of those projects do go ahead," Putin said.


Rising oil and gas exports square the books at the Russian treasury, which depends on them for more than half its budget. But they also give Britain and its ally in Washington a welcome counterweight to Middle Eastern dominance of global oil markets.

Putin has clearly prioritised output growth over prices in the oil sector, and extra Russian supply has singlehandedly covered world demand growth for three years. But Moscow has maintained a fragile alliance with the OPEC cartel since 1998.

"In the short run, the economy is not sufficiently diversified to forget about the oil price. They are forced to pay attention to both sides of this story," Sundstrom said.

Britain and Europe have tried to lure Moscow further into their camp through the European Energy Charter, designed to cement free market reforms in the former Soviet states, as a precursor to membership of the World Trade Organisation (WTO).

Moscow has yet to ratify the charter, which could threaten the government's cooperation with OPEC in any future attempt to prop up prices with supply cuts.

While most of Russia's oil industry is now in the private sector, the Kremlin maintains an iron grip on the sector through its pipeline monopoly Transneft.

And Russia's rouble-denominated domestic oil market, which prices crude at a discount to world levels, could also come under pressure to pay world prices.

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