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RIA Novosti: Russia says to honor PSAs, as Sakhalin energy project woes mount

14:47 | 19/ 09/ 2006

MOSCOW, September 19 (RIA Novosti) – Russia may stop using production-sharing agreements for mineral deposits but will honor contracts being implemented, the economic development and trade minister said Tuesday.

German Gref also said the government could not support all the proposals made by foreign companies on spending on the Shell-led Sakhalin II energy project, one of the key PSA schemes in Russia, after project costs doubled to $20 billion and the Natural Resources Ministry annulled its own approval of an environmental study. Japan, which has major interests in the project, has already signaled the move could affect relations.

The minister said PSA schemes, which were developed in the mid-1990s as a way to attract investment when the state was hard pressed for financing, could be discarded in the future.

“I believe that the investment climate in the country today and the external situation are such that we can cope without this regime and will work in standard conditions,” Gref said. “We will obviously ensure that current agreements are honored.”

The agreements made foreign investors in Russia exempt from nearly all taxes, but some politicians and economists have argued the arrangements have become outdated as Russia enjoys the boons of an economic upturn largely driven by high commodity prices. Royal Dutch Shell and ExxonMobil are working under PSAs on the island of Sakhalin off Russia’s Pacific coast and France’s Total is the main partners in another on a Siberian oil field.

The Economic Development and Trade Ministry previously defended PSAs being implemented. “Every signed PSA is a law,” Kirill Androsov, a deputy minister said September 6. “So far, we have not terminated a single PSA, and I see no reason for doing that,” he said.

Sakhalin II

Speculation over the PSA for the Sakhalin II liquefied natural gas project has been mounting against the backdrop of problems encountered by the Sakhalin Energy Investment Company and projector operator Royal Dutch Shell.

The Ministry of Natural Resources annulled Monday its approval of a 2003 environmental study on Sakhalin II after prosecutors protested the original endorsement. The revocation means Shell will be unable to execute plans to develop a crucial LNG plant with supplies to Japan supposed to start in 2008.

An environmental watchdog began inspecting Sakhalin Energy’s alleged violations of ecological legislation and project specifications July 25. The Federal Service for the Oversight of Natural Resources said its experts found the company had failed to build anti-erosion facilities and had registered excessive disposal of industrial wastewater from the Molikpaq offshore production platform.

“In addition, Sakhalin Energy has consistently violated the schedule for submitting statistical reports on water consumption,” the agency said. “In 2005, the Federal Service for the Oversight of Natural Resources registered excessive disposal of industrial wastewater from the Molikpaq platform, which is a violation of the Russian Water Code.”

It also said Sakhalin Energy had failed to submit reports on all prospecting and geological work on time. If a court upholds the service’s demands, all activity under the Sakhalin II project will be prohibited until the state ecological probe issues a revised conclusion and all environmental violations are eliminated.

Some analysts interpreted the environmental watchdog’s decision to be a form of pressure on the British-Dutch group to conclude a deal with Gazprom. The Russian energy giant has been pursuing a 25+1% share in the Sakhalin project in return for a 50% stake in the massive West Siberian Zapolyarnoye-Neocomian project. But with costs on Sakhalin spiraling, Gazprom has been seeking more advantageous terms.

The Sakhalin-II project comprises an oil field with associated gas, a natural gas field with associated condensate production, a pipeline, a liquefied natural gas plant and an LNG export terminal. The two fields hold reserves totaling 150 million metric tons of oil and 500 billion cubic meters of natural gas.

ExxonMobil, the project operator of another PSA on the sister Sakhalin I oil project, is also in difficulties with the Russian government as it seeks to increase the fields it can develop. The oil major says it has the license rights to them, but the government has indicated the blocks will be put up for auction.

Natural Resources Minister Yury Trutnev said September 12 that Russia would be looking to protect itself against losses on Sakhalin II. “Operators’ plans to increase reimbursable costs are not acceptable to the Russian side,” he said. “We cannot avoid reacting. If these plans are implemented, the Russian Federation will lose some $10 billion.”

Gref was more conciliatory Tuesday, though he did appear to criticize increased expenses.

“We must search for compromises on the Sakhalin II project,” he said. “We cannot support all investors’ proposals on increasing costs. We believe some of them are poorly developed and there is still a lot to be worked on.”

However, he refused to single out Sakhalin II. “I cannot comment on [the situation around the Sakhalin II project], I simply do not know.”

Japan

The difficulties put in jeopardy contracts with Japan, South Korea and the United States on supplies of liquefied natural gas, which are due to go into effect in 2008.

Two Japanese-backed companies – Mitsui Sakhalin Development (25%) and Mitsubishi-controlled Diamond Gas Sakhalin (20%) – are major shareholders in Sakhalin Energy, along with Shell Sakhalin Holding (55%).

Minister Trutnev met Monday with Yasuo Saito, Japan’s ambassador to Russia, and explained why his ministry had decided to backtrack on an environmental study into one of the country’s biggest energy projects.

The minister handed photographs ostensibly showing violations of environmental regulations during the project implementation.

“Recommendations were given three years ago, but they have still not been fulfilled,” Trutnev said. “It could be argued that they have been implemented in part, [but] I want to remind [you] that we cannot preserve nature by half.”

But Japan’s Chief Cabinet Secretary Shinzo Abe, who is considered a leading candidate to replace Junichiro Koizumi when the new leader of Japan’s ruling Liberal Democratic Party is elected Wednesday, said the Sakhalin II had great importance for Japan’s economic security and the Russian move could have a negative impact on relations between the two countries.

Ties between Moscow and Tokyo are already strained over the status of four disputed Kuril Islands – an argument that has prevented the signing of peace treaty marking the end of World War II – and an incident in August that led to Russian border-guards shooting dead a Japanese fisherman after they attempted to stop his vessel for allegedly poaching.

1 Comment on “RIA Novosti: Russia says to honor PSAs, as Sakhalin energy project woes mount”

  1. #1 Virgil Constantinescu
    on Sep 19th, 2006 at 10:25

    It’s just a blackmail!Gazprom make lobby at Russian Goverment,to take a stake from this project.
    Why they didn’t take the responsabilities from the start of the project?Gazprom envolve just know!They remember just now about the enviroment….

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