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Petroleum News: Russia using environmental challenges

Government appears to be putting pressure on Shell and other multinationals to win concessions for state-controlled companies

By Allen Baker
For Petroleum News

Royal Dutch Shell and other big multinationals working in Russia are seeing a variety of bargaining tools being used to pry concessions from them in favor of state-controlled entities.

The environmental ace is one of the cards now being played. On Aug. 3, Russia’s Natural Resources Ministry called for Shell to halt pipe-laying operations at its Sakhalin 2 project. The next day, the ministry said it would challenge the pipeline’s underlying environmental plan in court.

The ministry said in a statement Aug. 4 that the deputy head of its environmental watchdog body, Oleg Mitvol, was suing to revoke approval for a feasibility study that underpins the development. A day earlier, Mitvol had called for pipe-laying work on the island to be halted due to a risk of mudslides along about a dozen miles of the pipeline route.

Western environmental groups have already caused some major changes in pipeline routes to protect whale and fish populations, but Russian regulators have given the OK for the project to proceed as part of production sharing arrangements that the government doesn’t want to appear to renege on.

Galina Dubina, a spokeswoman for the Sakhalin Energy, said the company had no comment on the developments.

State-controlled OAO Gazprom had already pushed its way into the Shell-led consortium, gaining a 25 percent stake in Sakhalin 2 in exchange for half of the far northern Zapolyarnoye-Neocomian field, considered the world’s fifth-largest gas deposit.

But since development costs for Sakhalin 2 doubled to $20 billion, Gazprom has been looking for sizeable adjustments in the trade formula. The latest government moves may be intended as a signal to Shell that it needs to make some concessions.

Exxon plan opposed

Meanwhile, plans by Exxon Mobil Corp. to build a natural gas line to China from the Sakhalin 1 complex are in doubt, according to Russian press reports, also on Aug. 3.
The Kommersant daily reported that its sources at Gazprom say that company likely will oppose a Sakhalin-to-China pipeline because it would compete with Gazprom supplies from Siberia that would go to China in two other lines.

And that opposition comes even though Exxon already has a state-owned partner at Sakhalin 1 in OAO Rosneft, which holds 20 percent. Exxon and its Sakhalin partners are talking with CNPC, Kommersant reports, on a $1 billion pipeline to take about three-quarters of a billion cubic feet of Sakhalin gas to China each day.

Exxon had originally intended to send Sakhalin gas to Japan by pipeline. But Shell’s Sakhalin project and other LNG suppliers took that market instead. Sakhalin 1 partner ONGC of India wants its 20 percent share in LNG, though it’s not clear how that could be accomplished.

Pressures are being seen at other companies as well. The Kharyaga oil field in the Arctic, operated by Total, has been accused of environmental violations.

And TNK-BP has a number of government irons in the fire, from back tax issues to accusations of environmental problems at the Kovykta gas field to reports that Russia plans to designate as a national park an area in the Orenberg region where TNK-BP hoped to develop reserves of more than 300 million barrels of oil.

Squeeze is on

Russian is clearly tightening its lucrative hold on the oil industry by a number of different measures, from the effective seizure of Yukos to a law that requires “strategic” fields to be developed only in partnership with a majority Russian entity.
There are more subtle pressures as well.

Gazprom is dangling a chance to be part of the Shtokman gas field in the Barents Sea before the big Western oil companies. That puts pressure on them to compromise on other deals.

Beyond the commercial aspects are political ones. Russian President Vladimir Putin’s current disenchantment with the United States is seen in some quarters as making Shtokman more likely to land in the lap of a European oil concern.

Already, Gazprom’s purchase of Sibneft and Rosneft’s acquisition of Yukos interests give the Russian government control about a third of the country’s oil.

What may make Russia a little different from Brazil or Indonesia, for example, where there are big government oil champions, is that the two Russian giants are backed by different factions in the Kremlin and are competing with each other. China similarly has a number of government-dominated entities that occasionally end up aiming at the same acquisition target.

Material for this story was provided by The Associated Press

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