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Sunday Telegraph: Oil majors fear Russia wants deals rewritten

By Sylvia Pfeifer
(Filed: 17/09/2006)

Russia’s natural resources ministry has stepped up its pressure on foreign oil companies amid increasing signs of the state’s tightening grip on the country’s energy industry.

The ministry has written to Royal Dutch Shell, ExxonMobil and France’s Total to demand the original texts of production-sharing agreements (PSAs) signed in the 1990s, as well as amendments and forecasts. The agreements, which include two huge projects on Sakhalin island in the far east of Russia, were signed at a time when oil prices were low and Russia was eager for foreign capital to invest in its energy reserves.

As crude prices have soared, the agreements have become a source of irritation to the government, which is keen to give precedence to domestic companies such as Gazprom and Rosneft.

Unlike other agreements, PSAs do not fall under Russia’s regular tax regime. Instead, the government takes its share of the profits in the oil and gas produced – but only once the investors’ costs have been covered. Shell, which had to double the planned costs for its $20bn oil and gas project in Sakhalin last year, has come under particular scrutiny in recent months.

“It’s a lever being used to ratchet up the pressure on the Western oil companies involved in PSAs,” said Stephen O’Sullivan, the head of research at Deutsche Bank in Moscow.

Russian officials have so far said they do not intend to change the terms of the agreements, but executives at the oil companies are becoming increasingly concerned over the tactics employed by various ministries. Shell, for example, had more than 200 inspections at its project in the first six months of this year.

All three companies have already come under increased pressure from the natural resources ministry for alleged environmental violations. Earlier this month the ministry applied to the courts to halt Shell’s Sakhalin-2 project, claiming such violations. The company has rejected the allegations. Gazprom is in talks with Shell over an asset swap that would give it a 25 per cent stake in the project.

Exxon’s Sakhalin-1 project and Total’s Kharyaga field in the Arctic have also come under increased criticism from the ministry.

The threat of increasing state control over Russia’s energy assets is being watched closely by executives at other oil majors, including BP.

The oil company has ploughed a lot of money into Russia via its TNK-BP joint venture, which now represents about 20 per cent of its overall production. It is also working with Rosneft, the state–controlled oil giant that listed on the London Stock Exchange earlier this year, on a project in Sakhalin. Lord Browne, BP’s chief executive, took the controversial decision to invest $1bn in Rosneft at its flotation.

Browne has so far also managed to maintain a good working relationship with Russia’s president, Vladimir Putin. Analysts have cautioned, however, that things could change once Browne retires at the end of 2008.
 

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