A file of our news stories stretching back to July 2005 concerning the former Royal Dutch Shell Sakhalin II project can be found on the link below: -

http://www.shellnews.net/blog/our-dire-warnings-about-sakhalin-since-july-2005.html

With all due modesty, no one has run alarm bells as loudly or as long about this ill fated project or have been as accurate in forecasting the current disastrous outcome for Shell both financially and in respect of its reputation. Our warnings have resulted from information received from Shell/Sakhalin insiders.  

(Man of the people … Vladimir Putin greets children in Moscow’s Red Square.
Photo: AP/Yuri Kochetkov)

The New York Times
Steven Lee Myers in Moscow

INSIDE the Kremlin last week, the executives of three big international companies - Royal Dutch Shell, Mitsubishi and Mitsui - heaped praise on the man whose government had forced them to cede control of the world’s largest combined oil and natural gas project.

“Thank you very much for your support,” Shell’s chief executive, Jeroen van der Veer, told the President, Vladimir Putin. The meeting ended a six-month regulatory assault on the project, Sakhalin II, but only after the companies surrendered control of it to the state energy giant, Gazprom.

It was a telling occasion, with lessons that extend beyond energy policy to such disparate matters as the killings of the former KGB agent Alexander Litvinenko in London and the journalist Anna Politkovskaya.

Mr Putin’s Russia, buoyed by oil and gas riches, has grown so confident that it has become impervious to criticism that once might have modified its behaviour. And those who might once have criticised, from investors to foreign governments, have largely acquiesced to the new reality.

The Kremlin is now dictating its terms with greater assertiveness than at any time since the collapse of the Soviet Union - 15 years ago on Monday. Many hoped that Russia’s presidency of the Group of Eight industrial nations this year would temper Mr Putin’s diplomacy, but it has not.

Russia began this year by making good on a threat to cut off natural gas to Ukraine to get a higher price for Gazprom. The brief shut-off provoked concern in Europe about dependency on Russian energy. Russia is ending the year by warning Belarus of the same fate.

Gazprom threatened on Tuesday to halt natural gas supplies to Belarus if it did not agree to a large price increase by New Year’s Day. Gazprom, the world’s largest energy company by volume of reserves, is insisting Belarus pay more than double its current price.

“Responsibility for what has taken shape today lies with the Belarusian side,” Gazprom’s chief executive, Aleksei Miller, said to a Belarusian delegation led by the First Deputy Prime Minister, Vladimir Semashko.

The US and Europe have little leverage beyond persuasion. And persuasion no longer works, as the Kremlin’s campaign against Sakhalin II, the largest foreign investment project in Russia, showed. The campaign began with surprise inspections by a little-known environmental inspector who threatened to fine developers for every tree they cut down.

As the campaign unfolded, analysts issued warnings, and Western diplomats and their governments protested. But in the end the Kremlin got what was clearly its goal: state control of a lucrative project that opens the gas market to Asia.

The three companies with the most to lose said nothing critical as they sold 50 per cent plus one share of Sakhalin II at what some some analysts say is a discounted price, $US7.45 billion ($9.5 billion). Mr Putin then declared that the project’s environmental problems could “be considered resolved”.

The New York Times
December 28, 2006

By Heidi Vogt
The Associated Press
Sunday, December 31, 2006

DAKAR, Senegal

Angola is joining the Organization of Petroleum Exporting Countries, African oil exploration is booming, and China is investing. The stampede for oil in Africa has continued even as militant attacks in some countries and precarious governments in others make returns uncertain there.

Though much of the continent is just as conflict-ridden as the Middle East, analysts say, Africa is increasingly attractive because it is one of a diminishing number of regions still welcoming foreign corporations.

“It’s one of the few places still where in virtually every country the international oil companies can invest,” said Julian Lee, senior energy industry analyst at the Center for Global Energy Studies in London. “I can’t think of anywhere in Africa that has not let in international companies.”

The Middle East, which has nearly 60 percent of the world’s proven reserves, operates mainly through state-owned companies.

Russia, the world’s second-biggest oil exporter, after Saudi Arabia, took over much of the oil company Yukos this year and has continued to tighten its control over foreign companies.

Meanwhile, South American policies have become increasingly nationalistic: Venezuela forced revised contracts on foreign oil companies, Bolivia nationalized its petroleum industry, and strong leftist parties in Peru and Ecuador have made corporations increasingly wary.

Venezuela’s president, Hugo Chávez, “has basically politicized Latin American oil,” said Mehdi Varzi, who heads an independent oil consultancy in London. But Varzi said nationalization was not an option for African countries with poor infrastructure and little technical expertise to develop an oil sector on their own.

Mauritania, Africa’s newest oil producer, was long only a potential oil exporter until a deal with a team headed by Woodside Petroleum led to offshore finds in 2001.

Though Mauritania’s reserves are small by world standards, about a billion barrels, the government estimates that it will report oil revenue of $350 million in 2006, its first year of production. That is major revenue for one of the world’s poorest nations.

Woodside, which is based in Australia, owns the largest stake of the field, nearly 48 percent, and Mauritania’s government owns 12 percent.

Foreigners also show no signs of leaving Nigeria, even though normal daily production of 2.5 million barrels has been cut by a quarter in attacks by militant groups angling for a greater share of oil wealth.

Nigeria, Africa’s biggest oil producer and the fifth-largest supplier to the United States, is host to multinationals like Royal Dutch/Shell and the Italian oil company Eni in profit-sharing agreements with state-owned companies. In a stark contrast to Russia and Venezuela, the Nigerian government is making efforts to privatize more of its oil operations, according to Shell financial reports. The government has a majority share in Shell partnerships and the petroleum sector accounts for about 80 percent of Nigeria’s revenue.

Still, African oil development has problems that can trump those of the Arab world. Nigeria is often near the top of lists of the world’s most corrupt countries, as is Angola. Much business in both countries takes place in an informal economy. And long histories of coups in many regions mean that new governments cannot always be counted on to keep old promises.

While Africa will probably never compete with the Middle East, there is plenty of oil to be found. The continent’s proven oil reserves more than doubled from 1980 to 2005 to 114.3 billion barrels, according to the BP Statistical Handbook. That is a growth rate comparable to the Middle East and far outpaces a worldwide increase of 84 percent during the same period.

African production rose about 60 percent during the same time and now accounts for about 12 percent of the world’s oil.

There is enough demand that although U.S. and European companies have largely stayed away from Sudan, the country has found foreign investment from Asia.

China is the primary foreign investor in Sudanese oil fields and has not showed any signs of reducing involvement, despite the continuing threat of United Nations sanctions over Sudan’s refusal to allow UN peacekeeping troops into Darfur.

Over the past decade, many poor African countries have moved toward privatization of state-owned enterprises under the advice of the World Bank. In an October report, the World Bank encouraged Angola — Africa’s second- largest producer, after Nigeria, and one of the continent’s fastest growing oil powers — to do more to encourage private investment.

Peter Egom, an economist and research fellow at the Nigerian Institute of International Affairs, argued that Africa had the manpower and ability to aspire to oil nationalism. He argued that the major stumbling block for African oil producers was the lack of financial means because nations with weak currencies have to compete in an industry where the dollar is the currency of trade.

Perhaps to counter this obstacle, Venezuela has worked hard this year to befriend African nations.

Chávez attended an African Union summit meeting in Gambia this summer and pushed for South American- African partnerships. A conference between South American and African countries last month ended with an agreement to explore natural resource collaborations.

Yet even as Africa tries to decide the best way to exploit its resource, some analysts say the continent’s promise of vast oil reserves has been overhyped.

Greg Priddy, an analyst for Eurasia Group, said much of Africa’s oil is more expensive to extract than Middle East oil, so it may be full of opportunity only as long as oil prices stay high.

EXTRACT: POOR RECORD: The EBRD is supposed to demand strict environmental compliance from its borrowers and green groups said Shell’s poor record in managing Sakhalin-2 meant the project did not qualify.

THE ARTICLE

Sun Dec 31, 2006 3:22 PM GMT  
By Tom Bergin

LONDON (Reuters) - Russian gas giant Gazprom’s decision to take a majority stake in the Royal Dutch Shell-led Sakhalin-2 project may save the European Bank for Reconstruction and Development (EBRD) from having to approve its most controversial loan application ever.

Analysts and industry executives said the fact Gazprom is government-controlled means the EBRD will likely be precluded by its charter from extending a loan to the project.

The bank was founded to help the countries of the former Soviet bloc move towards market economies but the Sakhalin deal — which followed months of pressure on the project partners from the Russian government — amounts to a renationalisation of the Sakhalin-2 oil and gas fields, analysts say.

“This new development certainly does make it more difficult for the bank (to participate) and it may certainly make the EBRD less needed in the project,” said Brigid Janssen, the EBRD’s director of communications.

Shortly before Gazprom, Shell and their Japanese partners Mitsui and Mitsubishi in the $22 billion project announced the deal on December 21, Mitsui and Mitsubishi told analysts that the project may no longer seek financing from the EBRD and other western government-backed lenders.

Previously, the EBRD was under pressure from its owners — mainly western nations — to approve the strategic project, sources inside the EBRD and industry sources said, despite sharp criticism from environmentalists.

Janssen said the EBRD had not yet decided on whether the project met its environmental criteria and had yet not decided whether Gazprom’s involvement precluded a loan.

Sakhalin-2 is 80 percent complete and industry executives and analysts expect the project to be completed irrespective of whether it secures a $6 billion to 7 billion finance package from the EBRD and others.

Oil and gas production will occur near the feeding grounds of the endangered Western Gray Whale and pipelines transporting the oil and gas must cross more than 1,100 rivers and water courses.

Shell admitted failings but said these had been rectified.

EBRD insiders conceded the bank’s reputation as an environmentally conscientious lender was on the line but the bank feels its involvement over recent years had prodded Shell to improve the project’s record.

The EBRD’s strict environmental rules mean other lenders often base their lending decisions on whether the bank decides a project is environmentally sound.

Gazprom’s involvement in the project, at what analysts saw as a knock-down price, is a big blow for Shell. Following the deal, analysts at Citigroup cut their earnings forecasts for the Anglo-Dutch oil major by 4 percent after 2009, when the project comes fully onstream.

© Reuters 2006. All Rights Reserved.

By Sylvia Pfeifer
31 December 2006

Europe’s top development bank is set to walk away from the Sakhalin-2 energy project in what will be seen as an embarrassing snub to the renationalisation policy of Vladimir Putin, the Russian president.

The London-based European Bank for Reconstruction & Development – which was established to encourage free markets in the former Soviet bloc – fears that the $20bn Russian scheme no longer qualifies for support after Shell and its two partners were forced to sell stakes to Gazprom, the state-owned gas company.
  
“With the emergence of Gazprom as the major shareholder in Sakhalin Energy Investment Company, the project has effectively been nationalised,” said one industry executive familiar with Sakhalin. “The bank doesn’t normally back projects of that nature.”

The EBRD, which has a strong track record of investing in Russia, had been in discussions with Shell and its Japanese partners, Mitsui and Mitsubishi, about providing loans of around €400m (£270m) to the Sakhalin-2 project in Siberia for several years.

The Sunday Telegraph has learned that the bank is now unlikely to participate, although it has yet to take a final decision.

Gazprom wrested control of the project just before Christmas after a campaign lasting almost a year in which the Russian government threatened to cancel construction permits on environmental grounds. The company agreed to pay $7.45bn in exchange for a 50 per cent stake plus one share. The move was seen as further evidence of President Putin’s drive to tighten his grip on Russia’s energy assets.

Although the size of the projected loan from the EBRD is relatively small compared with the estimated $20bn (£10.5bn) cost of the whole project, the bank’s support has been regarded as crucial to help boost its green credentials. The project has come under fire from environmental groups that claim it affects the feeding grounds of endangered whale species and salmon spawning grounds. The bank has carried out extensive analysis of the project’s environmental effects.

In the past 12 months Putin has repeatedly used Gazprom to confirm the country’s emergence as an energy superpower. In January he ordered the company to cut off gas supplies to Ukraine, triggering shortages and price spikes in Europe. Now Gazprom is once again threatening to disrupt supplies, this time to Belarus, which has until New Year’s Day to accept higher gas bills. Gazprom has always argued that its aim is to raise prices in the former Soviet Union to market levels and end subsidies dating back to Soviet times.

At the same time, the operating climate for foreign companies in Russia has become increasingly difficult. After years of discussion, the Kremlin earlier this year decided to exclude foreign groups from the huge Shtokman gas project in the Barents Sea.

TNK-BP, the Russian joint venture of BP, is also coming under pressure from the authorities, which have already accused it of breaking a licence agreement for a giant Siberian gasfield, Kovykta. TNK-BP and Gazprom have been talking about the joint development of the project for years but have not reached an agreement.

For Shell, meanwhile, the loss of control at Sakhalin is expected to have serious consequences for its plans to boost production by 2009, which were put in place after its reserves debacle two years ago. At the time, Shell was forced to admit that it had overstated its oil and gas reserves.

Analysts at Citigroup, the US bank, said they expected the company to fall short of its production target for 2009. In a further blow it emerged last week that Shell and its partners would have to foot the bill for some $3.6bn of cost overruns on Sakhalin-2 themselves.

Last night a spokesman for the EBRD in London said: “This is a new development. The bank will review it.” A spokesman for Shell declined to comment.

Added by ShellNews.net:

The Sakhalin II project and related backdrop events have been marked by deception, double-dealing, corruption, massive pollution, intrigue, blackmail, murder and spies. Some might unfairly say this constitutes a fairly typical Shell project, as per the example of Shell’s activities in Nigeria.

With the assistance of a number of Shell/Sakhalin Energy insiders, we are completing the draft of an article which will be published next week on our own website and simultaneously by a news publishing source.

Coming soon… the inside story on the Sakhalin II debacle