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Financial Times: Russia calls for review of two foreign oil projects

Financial Times: Russia calls for review of two foreign oil projects


By Financial Times reporters

Published: May 26 2006 03:00 | Last updated: May 26 2006 03:00


Russia's natural resources ministry yesterday called for a review of the two largest foreign oil projects in the country, even as senior officials sought to assure EU leaders that Russia was a reliable energy partner.


The ministry said the legal agreements underpinning oil and gas developments on Sakhalin island, on Russia's eastern flank, were ineffective and should be reviewed.


It said it planned to ask the Duma, Russia's lower house of parliament, to review production-sharing agreements signed in the 1990s, saying they were damaging Russia's national interests.


PSAs are legal contracts between companies and governments which underpin investments and are designed to safeguard foreign companies from political volatility.


Any review of PSAs would threaten the two largest foreign investments in Russia: the Sakhalin-1 project, on which ExxonMobil and its partners have already spent nearly $5bn; and the Sakhalin-2 project, in which Royal Dutch Shell and its partners are investing $20bn.


Affiliates in Rosneft hold a 20 per cent stake in Sakhalin-1. Under the terms of an asset swap agreed last year, Gazprom is also set to acquire a 25 per cent state in Sakhalin-2.


For international oil companies, a reduction in their stake in Russian projects – which for many constitute major investments – would be a serious loss at a time when they are finding it more difficult to locate new sources of oil elsewhere. Most of the foreign companies in Russia are finding their reserves bases are already shrinking.


However, two Russian ministers insisted separately that all Moscow's agreements with foreign energy companies would be honoured, suggesting a rift had opened within the government.


Speaking on the margins of a European Union-Russia summit in Sochi, Viktor Khristenko, energy minister, told the Financial Times that there were elements of the agreements Russia was no longer happy with.


“If I was signing them again today, I would do it differently,” he said. “But they are legal obligations for us. We are fulfilling them and we expect our partners to fulfil them.”


German Gref, Russia's economy minister, added: “We can only work in the framework of the existing agreements.”


Chris Finlayson, the head of Shell's Russia operation, said the company had been told recently by the energy ministry that existing PSAs would be honoured. “I have no reason to doubt this,” he said.


ExxonMobil said: “While we will not comment on the recent news reports, we have a strong working relationship with the Russian government and the ministries responsible for Sakhalin-1.”


Nevertheless, the statement by Russia's resources ministry comes as the Kremlin moves to reassert control over energy resources, helping state-controlled companies such as Rosneft and Gazprom gain influence.


The ministry of natural resources, as well as some senior politicians, argue PSAs may be the wrong model for their country.


The first oil man to argue against PSAs was Mikhail Khodorkovsky, the jailed Russian oil tycoon. He argued that Russia was too civilised a country for PSAs. “Their argument is that PSAs may be fine for Africa, but not for Russia,” one foreign executive says.


Russia's natural resources ministry also said it would start legal proceedings against Total, the French oil company, for allegedly violating its licensing conditions for the development of the Kharyaga oil field in the north of Russia.


The ministry said: “We have all the evidence that Total's use of the oil field is not effective.” Total declined to comment.


By Arkady Ostrovsky in Moscow, Neil Buckley in Sochi, Thomas Catan and Carola Hoyos in London


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