International Herald Tribune: An outcry over fate of gas project in Russia

Agence France-Presse, Bloomberg News, Reuters
Published: September 19, 2006

Russia’s decision to revoke environmental approvals for one of the world’s biggest energy projects caused widening concern, as Shinzo Abe, the next Japanese prime minister, warned of a chill in diplomatic relations and the European Commission said it was closely watching Moscow’s actions.
 
Gazprom, the Russian gas monopoly, said Tuesday that it had suspended asset swap talks with Royal Dutch Shell concerning the $20 billion Sakhalin-2 natural gas project that Shell operates, after the ruling Monday threw the future of the project into question.
 
Gazprom had planned to swap 50 percent of its Siberian Zapolyarnoye field against a 25 percent stake in Sakhalin-2, which will eventually supply liquefied natural gas, or LNG, to customers in Japan and the United States.
 
But the plan ran into trouble after project costs for Sakhalin-2, the biggest single foreign investment in Russia, were doubled to $20 billion, while the first LNG delivery would be postponed by six months to summer 2008.
 
Analysts have said that Gazprom, which is trying to join the consortium that Shell now controls, is eager to renegotiate terms or force Shell to concede to Gazprom’s demands in the production-sharing deal.
 
“The Russians want in, full stop,” said Al Breach, the chief economist at UBS analyzing the country. “Russia does not want these big fields run by foreign companies. They are putting pressure on Shell to come to a deal. It’s all about money.”
 
Sergei Kupriyanov, a spokesman for Gazprom, said Tuesday: “As far as our assets swap talks are concerned, they haven’t progressed for more than a year after Sakhalin-2 declared changes to the initial economic parameters of the project, which have yet to be approved by the Russian Federation.
 
“In this situation, we cannot continue talks,” he said.
 
Sakhalin-2, located in the far east of Russia, is 55 percent owned by Shell, which operates the project and was nearing completion of its second phase. Two of the biggest Japanese trading companies own a combined 45 percent stake.
 
The Russian government has so far declined to approve the cost overrun, while state agencies have attacked Shell for breaking the environmental terms of the project.
 
On Tuesday, Economy Minister German Gref of Russia said that he did not think the increased costs had been worked out properly. Shell, he said, “have yet to take another look.”
 
Shell executives have said that soaring steel prices, the appreciation of the Russian ruble and a tight market for oil rig equipment drove up costs.
 
Gref added that Russia considered production-sharing deals to be an outdated mechanism to attract foreign investment, but added that all existing deals should be respected.
 
The revocation of environmental approvals for the Sakhalin-2 project ignited fresh diplomatic tension with Japan on Tuesday. The trading company Mitsui owns a 25 percent stake, while Mitsubishi has 20 percent.
 
“I am concerned that major delays might have a negative influence on overall Japan-Russian relations,” Abe told a news conference.
 
“This has raised the possibility of a delay in gas production,” said Hideaki Kurihara, an analyst at Shinko Securities. “It certainly is not positive for the shares in the two trading companies.”
 
Mitsui and Mitsubishi have already invested an estimated $4.7 billion in the project, and Mitsui plans to spend another ¥200 billion, or $1.7 billion, over the next two years.
 
The fuel will be supplied to customers including Japan’s largest electricity producer, Tokyo Electric Power, as well as other committed buyers in South Korea and the United States.
 
In Europe, where Russia this year stoked concerns about energy security after it shut gas supply to Ukraine amid a pricing dispute, the European Commission said it took Russia’s decision “very seriously.”
 
“In order to ensure that companies are willing to invest in multi-billion euro energy projects, a secure and predictable investment climate is necessary in Russia as in the EU or indeed any country,” Energy Commissioner Andris Piebalgs said in a statement.
 
He called on Moscow to guarantee a secure and predictable investment climate.
 

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