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MosNews: Russia Promises to Keep Existing PSAs, Says New Ones Unlikely

Created: 07.09.2006

Russia will not abandon existing production sharing agreements with foreign oil and gas companies, but it is unlikely to pursue further such deals in the future, the country’s Deputy Economy Minister Kirill Androsov said on Wednesday, Sept. 6.

Androsov also said he had no information supporting speculation that gas giant Gazprom might be seeking more than 25 percent of Shell-led Sakhalin Energy, the operator of Sakhalin-2, a major oil project in the Far East.

Last year Royal Dutch/Shell, 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 development costs to double at the Sakhalin Energy project to $20 billion, prompting Gazprom to say it would reassess the planned exchange. Ever since then the companies have been in a deadlock failing to agree on who would get what. As MosNews reported, Sakhalin-2 has been recently troubled by all sorts of accusations from different government bodies, including a lawsuit from environmental regulator Rosprirodnadzor. Observers have speculated that all of this is being done in order to put some pressure on Shell in its negotiations with Gazprom.

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 (PSA) signed in the 1990s. The other is Exxon Mobil Corp.’s Sakhalin-1 oil project, which has state-controlled oil company 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. Analysts began 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 on Tuesday, Sept. 5, 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.

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