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International Herald Tribune: Russian will not abrogate existing production-sharing agreements

The Associated Press
WEDNESDAY, SEPTEMBER 6, 2006

MOSCOW Russia will not abandon existing production sharing agreements with foreign oil and gas companies, but is unlikely to pursue further such deals in the future, the RIA-Novosti news agency quoted a senior official as saying Wednesday.

Deputy Economic Development and Trade Minister Kirill Androsov also said he had no information supporting speculation that gas giant OAO Gazprom might be seeking more than 25 percent of Sakhalin Energy, the operator of Sakhalin 2, a major oil project in the far east, the report said.

Last year Royal Dutch Shell PLC, which leads the Sakhalin Energy consortium, announced a preliminary swap deal with Gazprom that would give the state-controlled Russian company up to 25 percent in Sakhalin Energy in exchange for a 50 percent interest in Gazprom’s massive Zapolyarnoye gas field in northern Russia. But only days later, Shell said it expected costs to double at the Sakhalin Energy project to US$20 billion (€15.6 billion), prompting Gazprom to say it would reassess the planned exchange.

Sakhalin Energy currently pumps about 80,000 barrels a day of crude oil, and plans to start shipping liquefied natural gas, or LNG, to East Asian and North American markets starting in 2008. Sakhalin-2 is one of two projects in Russia’s Pacific offshore being developed by Western oil companies under production-sharing agreements signed in the 1990s. The other is Exxon Mobil Corp.’s Sakhalin-1 oil project, which has state-controlled oil company OAO Rosneft as a partner.

The production sharing agreements were backed by the Russian government in the early 1990s when the nation was undergoing a painful transition to a free-market economy and lacked funds to explore its mineral wealth on its own.

With windfall oil revenues changing Russia’s economic fortunes, some officials called for revising the terms of the agreements. Russian environmental officials have been threatening to halt the development of Sakhalin 2, leading analysts to speculate that Russia might be trying to restructure the PSA to the state’s benefit.

Androsov’s remarks echo similar comments by Kremlin aide Igor Shuvalov, who said Tuesday that accusations by the Ministry of Natural Resources against Sakhalin Energy had nothing to do with any desire to renegotiate the terms of the PSA governing the project.

Shuvalov added, however, that in his “personal opinion” the best thing for Sakhalin Energy to do would be to pay taxes under the normal regime paid by other oil and gas companies. The PSAs for Sakhalin-1 and Sakhalin-2 are parliament-approved acts that guarantee specific tax treatment.

The Sakhalin Energy consortium is majority-owned by Shell, while a subsidiary of Japan’s Mitsui & Co. Ltd. holds a 25 percent stake and Diamond Gas Sakhalin, a subsidiary of Japan’s Mitsubishi Corp., holds 20 percent.

Also Wednesday, Russia’s Ministry of Natural Resources said a state commission has rejected a request from Exxon to widen the border of the Sakhalin-1 project to include the entire Chayvo oil field. The committee has recommended that the part of the field outside the boundaries set in the PSA be sold off in a separate auction.

Other Sakhalin-1 consortium members include Japan’s Sakhalin Oil and Gas Development Co Ltd., with 30 percent, India’s ONGC Videsh Ltd., with 20 percent, and two Rosneft subsidiaries.

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