RBC, 28.02.2007, Tokyo 10:14:02.Gazprom will pay in cash for a stake in the Sakhalin-2 project, Russian Industry and Energy Minister Viktor Khristenko told a press conference in Tokyo today. He pointed out that a decision to this effect had already been made. Khristenko added that the process of Gazprom buying into Sakhalin-2 would be completed by the end of March, 2007. The minister also said that all participants of the project were interested in completing the construction of the liquefied natural gas plant and supplying the necessary resources within the deadlines, specified in contracts.

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MOSCOW, February 28 (RIA Novosti) - Russia’s Gazprom Export and Turkey’s Shell Enerji A.S. have signed a contract to supply Turkey with 250 million cubic meters of gas annually until 2021, a joint news release said.

The contract was struck between Gazprom Export, which handles the energy exports of Russian energy giant Gazprom [RTS: GAZP], and Shell Enerji, a subsidiary of Royal Dutch Shell, responsible for gas imports on the Turkish market.

“Under the contract, Gazprom will supply 250 million cu m of gas annually to Shell Enerji A.S. in the period up to 2021,” the news release said.

Shell Enerji A.S. won the tender for part of the gas contract belonging to the Turkish pipeline company Botas November 30. The tender was organized within a nationwide campaign to liberalize Turkey’s gas market.

Under the contract, Shell Enerji A.S. will start supplying Russian gas to Turkish customers in the second quarter of 2007.

Russia and Turkey established a gas partnership in 1984. Between then and 2005, Russia supplied a total of 138.7 billion cu m of natural gas to Turkey, and has been steadily increasing gas exports to its Black Sea neighbor in the past few years.

In December 2004, Gazprom and Botas signed a memorandum on gas cooperation, stipulating Russian gas supplies to Turkey directly or through subsidiary companies to end consumers. Gazprom and Botas also agreed to invest in gas distribution projects, develop underground gas storage facilities and gas power units on Turkish territory.

February 28, 2007
by KWR: Scott MacDonald 
 
NEW YORK (KWR) — February 27, 2007 — Russia has come a long distance from the bad old days of the 1990s when it was forced to default on its domestic debt, the economy almost slipped into free-fall, and the country’s politics were unsteady. Over the last few years the oil and commodities boom has translated into rapid economic growth, a substantial rise in foreign exchange reserves (over $311 billion as of February 16, 2007), budget surpluses, and the rise of strong national champion companies, such as energy giant Gazprom. Russia’s political life is more stable as well — but at the cost of its democratic politics. President Vladimir Putin and his intelligence network allies have broken the power of the oligarchs and many now live in London. This has diminished the liberal and Communist wings of national politics, and implemented a quasi-authoritarian system.

Yet, the year ahead is likely to be another testing period for Russia and its leadership. As Fitch noted on January 25, 2007: “…trends in oil prices, fiscal policy, investment and the management of the political transition of power could have a significant bearing on Russia’s development and creditworthiness in 2007″. This is especially the case as oil prices are likely to be lower, Russia’s foreign investment policies have not exactly been welcoming as of late, and the country faces both parliamentary and presidential elections over the next 16 months. While Russia is not likely to undergo the same type of crisis as occurred during the Yeltsin years — and default is only a distant consideration — uncertainty is never a good thing for investors and that is the terrain into which Russia is heading.

We believe that Russia faces tougher times ahead. This does not mean any major economic crisis or the threat of debt default, but the country’s economic progress will be much more difficult to obtain, even with further reductions in external debt. The key issue is that Russia is basically an energy and commodity producer, with some relatively uncompetitive industries attached. While prices for oil, natural gas, nickel and others stay high, the government is able to pursue a more relaxed fiscal policy and spread the wealth around, especially as Duma elections are scheduled for December and presidential elections in March 2008. A sharp fall in oil prices would certainly hurt government finances, but prices would have to slip below $38 per barrel on a sustained basis to make a difference over the medium term.

In its annual Article 4 report, the IMF emphasized that while Russia had made considerable progress, it had concerns that the oil and natural gas boom was concealing structural problems. As the report states: “Structural reforms outside the banking sector remain very slow. The authorities agreed that structural reforms are behind schedule and claimed that high oil prices and robust growth make it difficult to mobilize political support for reforms.” In particular, the IMF pointed to government finances, which are highly dependent on hydrocarbon revenues. The development agency warned “about the risk of a gradually emerging non-oil deficit and a spending structure that cannot be sustained if oil prices were to drop sharply, raising the specter of pro-cyclical fiscal tightening and the real exchange rate overshooting its long-term equilibrium.”

To the IMF’s concerns we would add Russia’s policies vis-à-vis foreign investment. Starting with Yukos, the big Russian oil firm bankrupted by overzealous tax inspectors, and following through with the 2006 Gazprom “offer that you cannot refuse” to Mitsui, Mitsubishi, and Royal Dutch Shell’s Sakhalin project, the Putin administration has made corporate governance a matter of falling in line with national interests as determined by the Kremlin. Foreign investors were treated poorly in both cases, leaving the door open to questions as to how safe it is to invest there.

Yet, there has been a take-off in investment in Russia, with growth of around 12 percent in 2006, reflecting net private capital inflows of $42 billion. This is up from $1 billion in 2005, and record foreign direct inflows of $31 billion were achieved. It would appear that excess liquidity in international markets is still attracted to riskier assets. The Economist (December 16th, 2006) noted the ongoing attraction of investment in Russia’s hydrocarbon sector: “With exploration prospects drying up in much of the Western world, and with countries of the Organization of the Petroleum Countries unwilling to open the taps, Russia is one of the few countries that could produce more oil…” This could be a case of the devil taking the hindmost - the last investor in could get hit with the worst deal.

The major concern with Russia is political. While it is probable that whoever Putin decides to succeed him will enter the Kremlin as the nation’s next president, we have entered a period of uncertainty as to who that person will be. This means that policy continuity is probable. It also means that Russian politics are entering a phase of sharp elbows, as potential candidates jockey for position. It will also influence the conduct of the Duma elections in December. This is not so much a question of how Putin’s United Russia party will do — it currently controls 309 seats out of 450 — but how factions within it will do and how they will help reinforce presidential bids.

The danger is that the fight within the government turns nasty and has an impact on policies. As Fitch noted: “However, weak and opaque democratic institutions and the ‘winner takes all’ nature of the contest could see a disconcerting battle for position between different post-election business and political groups in and around the Kremlin. A post-election shift in economic policies or heightened uncertainty over property rights cannot be ruled out.” Considering Russian problems in controlling the use of polonium, there could be a lethal undertone to factional infighting that cannot be entirely ruled out.

Related to this is Russia’s use of hydrocarbons as a means of influence on its neighbors. Over the last two years, Gazprom has been a state champion in raising prices of oil and natural gas in transit and being used by a group of countries encompassing Georgia, Belarus, Moldova and Ukraine. In most cases, Russian energy was being sold at considerable discounts to those governments. However, the hardball politics employed by Russia to push for higher prices (which it eventually got) also caused some disruption in energy supplies to the European Union. For Putin, energy is a source of funds, but also is critical in Russia’s return to great power status. As The Economist noted: “No longer need Russia go to the West cap-in-hand for money, as it did in Boris Yeltsin’s day.”

Consequently, we are left with a Russia still in transition. Where it is going is not exactly certain. Most likely we will see a country still dependent on energy and other natural resources, dominated by state capitalism and a ruling elite build up around the security apparatus and a fig-leaf of democratic procedure. In this scenario, badly needed structural reforms, important to the non-energy sectors and government finances, are likely to remain on the backburner until after the Duma and presidential elections, when a new government is in place.

What does this mean for investors? For debt investors this means Russia’s Baa2/BBB+/BBB+ ratings are stuck where they are now, but volatility can be expected to creep into the picture. Any major widening on Russian debt could provide a more attractive entry point, considering their current tight nature.

On the equity side we do have one recommendation - Mechel OAO, one of the country’s integrated mining and steel companies. Mechel has an ADR traded on the NYSE (MTL), which we think has room to grow and in which we currently own shares. The key attraction is that the global steel industry is in the process of consolidation and Russia’s steelmakers are actively engaged. MTL will also benefit from the imposition of duties against European Union stainless-steel sheet imports announced in February 2007. Currently steel production counts for around 5 percent of MTL’s revenues, leaving it plenty of room to expand.

With a market capitalization of $4.7 billion, MTL either continues its current growth or it gets acquired. In addition, the steel sector is one of the few areas where Russian companies are competitive outside of oil and gas. As a Standard & Poor’s report stated of the top four Russian steel-makers (January 24, 2007): “Their access to inexpensive labor, energy, and captive raw material sources offset any technological disadvantages, and allow the companies to post strong operating margins.” We are looking for an ADR stock price of $40 a share over the next six months. MTL is currently trading around $34.

Consequently, we are left with a Russia still in transition. Where it is going is not exactly certain. Most likely we will see a country still dependent on energy and other natural resources, dominated by state capitalism and a ruling elite build up around the security apparatus and a fig-leaf of democratic procedure. In this scenario, badly needed structural reforms, important to the non-energy sectors and government finances, are likely to remain on the backburner until after the Duma and presidential elections, when a new government is in place.

Concluding Thoughts

Russia has come a long distance from its 1998 default, but it still has a long way to go to move out of its Emerging Market status. This provides investors with opportunity, especially considering the run up in so many Emerging Markets in 2006. However, we would caution that seeking to take advantage of Russia’s ups and downs is highly speculative and not for the faint-hearted.

Scott B. MacDonald,
KWR International, Inc.

Scott MacDonald is a Senior Consultant at KWR International.

ASSOCIATED PRESS
February 28, 2007

TOKYO — Japanese ministers urged Russia yesterday to push ahead with a proposed trans-Siberian pipeline that will carry oil and gas to the Pacific coast to feed Japan, saying Tokyo is prepared to pay part of the construction cost.

Finance Minister Koji Omi also urged a visiting Russian delegation including Prime Minister Mikhail Fradkov to supply energy from a major project in Siberia recently taken over by Russia’s state-controlled natural-gas monopoly.

Japan, which is almost entirely dependent on imports for its oil and gas, has been scrambling to secure access to Russia’s reserves to reduce its dependence on Middle Eastern oil.

But a decision by Russia to run the proposed 4,300-kilometer oil pipeline close to its border with China has stoked Japanese fears that Moscow will favor Beijing and not extend the pipeline to the Pacific coast as quickly as planned.

Japan also expressed concern after state-controlled natural-gas monopoly Gazprom wrested control of the giant Sakhalin-2 oil and gas project in Siberia from an international consortium last year, consolidating the Kremlin’s command over national energy resources.

During a meeting between Japanese and Russian ministers on yesterday, Trade Minister Akira Amari said he welcomed the planned pipeline from inner Siberia to the Pacific coast, according to a Foreign Ministry official who briefed reporters.

Copyright © 2007 Associated Press
 

Feb. 28, 2007
Russian Prime Minister Showers Japan with Investment Projects

Yesterday was the first day of Russian Prime Minister Mikhail Fradkov’s official visit to Tokyo. Although the prime minister, in his own words, “was not trying to surprise the Japanese,” the sheer volume of offers soliciting participation in Russian investment projects brought the table by Mr. Fradkov and his entourage of government officials left the Japanese with their mouths hanging open. The Russian proposals are due to be discussed today, but all that the Japanese appear to want from the visit is a guarantee of gas supplies from Sakhalin and a conversation about the disputed Kuril Islands.

Prime Minister Mikhail Fradkov arrived in Tokyo yesterday for an official but strictly business-oriented visit. Several days before his arrival, the Russian White House stated that the visit would be purely about economics: the discussion will include trade and economic issues involving Russia and Japan and cooperation in the border areas between the two countries. From an economic point of view, the visit comes a little late, since Japan’s interest in investing in Russia peaked in 2004-2005. By 2006, when a flurry of Japanese proposals for cooperation on everything from gas and oil pipelines to timber went unanswered, Tokyo’s interest waned. However, judging from remarks by Mr. Fradkov and his deputies about what they have brought along on this trip to Tokyo, Japan’s investment-hungry mood of a few years ago had an audience in Russia, even if the Russians did not rush to reply.

After a meeting with Japanese officials in Tokyo on the eve of Mr. Fradkov’s arrival, Russian Energy Minister Viktor Khristenko explained what Japan wants from the Russian prime minister’s visit. The takeover orchestrated by the Russian gas giant Gazprom of the Sakhalin-2 project, which was previously focused on providing liquefied natural gas to the Japanese market, has upset Tokyo. In addition, the possibility that ExxonMobil, which operates the Sakhalin-1 project, will build a pipeline to China would deprive Japan, which lacks any energy resources of its own, of any hope of paying lower prices for energy. In essence, the Japanese side wants to receive a Russian guarantee that Japan will still be supplied with energy products even as Russia’s energy facilities are increasingly nationalized.

Besides Prime Minister Frakov and Energy Minister Khristenko, the Russian delegation in Tokyo includes Rosatom head Sergei Kirienko, Communications Minister Leonid Reiman, Transportation Minister Igor Levitin, and several Siberian and Far-Eastern governors. Yesterday Mr. Fradkov received an audience with Japanese Emperor Akihito, at which the two discussed global warming. He also spoke with Yohei Kono, the speaker of the parliament’s Chamber of Representatives. Today the Russian prime minister and members of the Russian-Japanese economic forum will meet with Japanese Prime Minister Shinzo Abe and leading Japanese businessmen to discuss economic issues.

The tastiest deal for the Japanese was prepared by the Russian energy minister. Japanese Economics Minister Akira Amari reported to Mr. Khristenko with some amazement that “Japanese companies” had already received an offer from Rosneft for participation in oil refining in the Far East and distribution of petroleum products in the Japanese market. Mr. Khristenko lauded the offer as “absolutely correct” and said it would be supported by the Russian government. He also made an offer worth $5-7 billion to Japanese companies involving participation in oil extraction to supply refineries in Primorsky Krai. In the wake of Russian President Vladimir Putin’s official refusal in June 2006 to give Japan a government guarantee of oil supplies from the Eastern Siberia-Pacific Ocean pipeline, Rosneft’s initiative looks extravagantly generous.

And that’s not all. Mr. Kirienko, the head of Rosatom, has offered to create a joint venture with the Japanese to enrich enough uranium on Russian territory to make 6,500 tons of fuel for Japan’s nuclear power plants, which are currently supplied by Great Britain and France. The leadership of Russia’s Vneshekonombank is signing a deal with a consortium of Japanese banks headed by Sumitomo Mitsui Banking Corporation for $200 million in loans for the construction of a new terminal at Moscow’s Sheremetevo Airport. Finally, an agreement will be signed today to create a joint venture between Severstal-Avto and Isuzu Motors to produce Japanese trucks at Russia’s Ulyansk automobile factory.

The Russian offers also included an initiative from Transportation Minister Igor Levitin, who suggested that Japanese companies participate in building a tunnel between Sakhalin and the mainland at a cost of $90 billion. Russia may have already received an answer from the Japanese: according to Mr. Levitin, his Japanese colleagues countered with a proposal to construct a tunnel from Sakhalin to the northern Japanese island of Hokkaido.

The one sticking point in Mr. Fradkov’s official visit has been the question of the Kuril Islands. Japan and Russia never signed a peace treaty after 1945, and Mr. Fradkov has been pestered by protestors in Tokyo and Japanese officials demanding that Russia return the islands, which Soviet troops occupied in late August 1945. Mr. Fradkov, clearly exasperated by the constant badgering, remarked that he does not want the issue of the Kuril Islands “to be an insurmountable barrier to investment cooperation.” He does not, however, see any compromise in the near future on the fate of the islands.

Whether Russia will make good on its promises to consider real investment by Japan in the Far East will become clear today. Above all, Tokyo wants answers regarding the events on Sakhalin: guarantees of supplies of energy resources from Sakhalin-1 and Sakhalin-2 are more interesting to Japan right now than any tunnels, atoms, fish, telecommunications, and even the Kurils, and that is what Mikhail Fradkov and Shinzo Abe will be discussing today.

Peter Netreba (Tokyo) and Dmitry Butrin

The arrival of BP (BP.L: Quote, Profile , Research) Chief Executive Lord Brown in Moscow has been met with the news that Oleg Mitvol, the official who led the recent campaign against Royal Dutch Shell’s (RDSa.L: Quote, Profile , Research) Sakhalin 2 project, will not budge on threats to revoke the licence which BP’s Russian joint venture company BP-TNK has with the government to develop the vast Kovykta oil and gas field in Siberia, the Financial Times said.

Wednesday 28 February 2007: By a Shell Insider

There is currently a severe shortage of good people in the oil business.

An ambitious individual (to spare his blushes I won’t mention his name) recently left Shell’s HR department and has set himself up as a recruitment consultant.

In order to get set up, it seems that he took copies of the personnel files of a number of people currently employed by Shell, whom he is now offering to “recruit” for his clients.

Anyone with a high CEP can expect a call soon…

It’s good to hear that there is still some entrepreneurial spirit around Shell!!

EXTRACT: The Edinburgh company, whose chief executive counts US president George Bush and Tony Blair among his friends, bought the exploration block from Shell for little more than GBP 10m.

THE ARTICLE

Martin Flanagan City Editor, The Scotsman - United Kingdom
Published: Feb 28, 2007

EDINBURGH-based oil explorer Cairn Energy is to return GBP 481 million to investors following the flotation on the Indian Stock Exchange of Cairn India Ltd.

Cairn, which raised dollars 1.18 billion from what was India’s biggest IPO in 2006, said shareholders would receive GBP 3 for each share held and the remainder of the proceeds would be retained by the business.

Sir Bill Gammell, the chief executive of Cairn Energy, said: “Following the successful flotation of Cairn India, the return of cash to shareholders has been a key priority and I am delighted to be announcing this earlier than was previously anticipated.

“Shareholders will receive GBP 3 per share and the remainder will be retained by the business with the aim of creating and realising further value for shareholders in the future.”

The return is to be implemented by way of a share scheme to provide UK tax resident shareholders with flexibility to elect to receive cash in the form of income or capital or a combination of both.

One B share will be received for each existing ordinary share held on 23 March 2007. There will also be a 13-for-16 share consolidation “to seek to maintain comparability of share price and earnings per share”, Cairn said yesterday.

The group’s Indian business was floated on the Bombay (Mumbai) Stock Exchange and the National Stock Exchange of India on 9 January 2007. The cash return and share consolidation has to be agreed by an extraordinary general meeting of Cairn shareholders on 22 March, 2007.

Shareholders can elect in respect of all or some of their B shares to receive a single dividend of GBP 3 a share.

It will be paid on 4 April, after which those B shares which have been so elected for the dividend payment will be automatically converted into deferred shares with a negligible value.

Analysts said yesterday that the Indian flotation and the capital return to investors was a major milestone for Cairn, which will now focus on new exploration work across south-east Asia

Cairn will drop out of the FTSE 100 blue-chip index in the first quarterly reshuffle of the index after the cash return is made - probably in June.

Cairn’s shares were trading at under 400p when it announced a 500 million barrel find in Rajasthan, north west India, in January 2004.

The Edinburgh company, whose chief executive counts US president George Bush and Tony Blair among his friends, bought the exploration block from Shell for little more than GBP 10m.

Last night Cairn’s shares closed down 43p at 1,587p.

Published: Feb 28, 2007

HOUSTON, Feb. 27 /PRNewswire/ — Almost all crude oil sold by the US federal government under its latest Royalty in Kind program is linked to prices published by Argus Media.

Companies buying oil from the government’s Minerals Management Service (MMS) specified Argus as the pricing reference in 98pc of all volumes offered at the US Gulf coast in an award announced February 27.

Six companies won crude oil volumes totaling 7.16mn bl, equivalent to roughly 41,750 b/d, which also included some US west coast oil. Winners were Chevron, ExxonMobil, Shell, Marathon, Plains Marketing and Citadel Investment Group. Deliveries will start on 1 April, and most will run over the ensuing three months.

The sale involves oil given to the government as royalties for production taken from federal leases. The Royalty in Kind Program allows the MMS to accept royalties in the form of a physical natural resource and sell it in the open market.

The Argus pricing method produces volume-weighted averages of deals done in the US crude oil market, and has been developed in close cooperation with crude producers, refiners and traders to reflect oil prices measured over the course of an entire day rather than at the market close.

“The oil industry’s preference for the Argus entire-day pricing method has been growing steadily over the last two years,” said Daniel Massey, president of Argus Media, Inc. “Clearly both refiners and producers feel that the most representative price should be the one backed up with the greatest volume of trade.”

Gulf coast prices published by Argus include Mars, Poseidon, Southern Green Canyon, Light and Heavy Louisiana Sweet, Eugene Island and Bonito. Benchmark WTI is also assessed each afternoon in the cash market at the US midcontinent. The prices appear daily in the Argus Crude and Argus Americas Crude publications.

MMS says the crude oil involved in the latest sale will translate into more than 293mn bl of gasoline, diesel fuel and other petroleum products.

In the government’s November oil sale, buyers chose Argus’ volume-weighted pricing method for over three-quarters of the volumes involved.

For further information contact Daniel Massey, president of Argus Media Inc, or Tim Mingee, global crude oil editor, on (1 713) 968-0000.

http://www.argusmediagroup.com

About Argus Media

Argus Media is a leading provider of price assessments, business intelligence and market data on the global oil, gas, electricity, coal, emissions and transportation industries. It is the largest independent energy publisher in the world and is headquartered in London. Argus has offices Houston, Washington, Los Angeles, Dubai, Singapore, Tokyo, Beijing, Moscow and other key centers of the energy industry. Argus was founded is 1970 and is a privately held UK-registered publishing company. Argus Media

CONTACT: Daniel Massey, president, or Tim Mingee, global crude oil editor, both of Argus Media Inc, +1-713-968-0000

Web site: http://www.argusmediagroup.com/

NEW DELHI, Feb 28 Asia Pulse - Petronet LNG Ltd (BSE:532522) is in advanced discussions for import of 2.5 million tons of liquefied natural gas (LNG) from the Gorgon Project in Australia, Minister of State for Petroleum and Natural Gas Dinsha Patel said on Tuesday.

“Pricing of LNG would be indicated by the suppliers at the time of conclusion of the agreement, which is linked with financial closure of the project,” he said in a written reply to a question in Rajya Sabha here.

The liquefaction and loading port facilities are planned by the suppliers at Barrow Island in the North West offshore region of Australia, while in India it will be unloaded at Kochi Port.

Petronet LNG Ltd will import 2.5 million tons of LNG from Chevron-operated Gorgon Project from 2012.

The Gorgon Project plans to develop the Greater Gorgon gas fields, located about 130 km off the north-west coast of Western Australia. The Greater Gorgon gas fields contain resources of about 40 trillion cubic feet of gas, Australia’s largest known undeveloped gas resource.

Chevron is operator of the project with a 50 per cent interest, with ExxonMobil and Shell each holding 25 per cent.

The project involves building two trains capable of producing 10 million tons per annum of LNG. Three shipments a week are expected to leave a dedicated LNG loading jetty.

Petronet currently imports 5 million tons per annum of LNG from Qatar at its Dahej terminal in Gujarat. It is building another LNG terminal at Kochi in Kerala with a capacity of 2.5 million tons per annum, expandable to 5 million tons. Kochi terminal will be ready by early 2010.

Besides, the company is also doubling the capacity of its Dahej terminal to 10 million tons by 2009. (PTI)