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.