Bloomberg: Royal Dutch Shell’s Sakhalin Oilfield Permit Annulled by Russia (Update3)

By Lucian Kim

Sept. 18 (Bloomberg) — Russia’s Natural Resources Ministry canceled Royal Dutch Shell Plc’s permit for the $20 billion Sakhalin-2 oil and gas development, as President Vladimir Putin expands his control over the country’s energy industry.

The Natural Resources Ministry said in a statement it had asked the Russian agency responsible for authorizing oil and gas development to annul Shell’s license, which would bring the cancellation into force. The ministry may also revoke similar operating permits for Exxon Mobil Corp. and Total SA, Interfax reported today, citing an official from the same ministry.

Putin is building up Russia’s importance as an energy supplier to Asia and Europe by using state-run companies to take greater control over the nation’s oil and gas assets. OAO Gazprom, the world’s largest natural gas producer, is seeking a stake in the Shell-led Sakhalin venture. OAO Rosneft bought a Siberian oilfield from BP Plc this year.

“It’s symptomatic of the Russian industry to take control of key assets at as low a cost as possible,” said Craig Pennington, global leader of energy research at Schroders Plc in London. “It’s all part of the bargaining for assets up for grabs in Sakhalin-2.”

Shell, Exxon, Total

The Natural Resources Ministry in May urged Shell, Exxon and Total to cede more control of their ventures to Russian companies. Gazprom is in talks with Shell about swapping assets to acquire a stake in Sakhalin-2.

“We act in strict conformity with the PSA and Russian legislation and expect the Russian Federation to honor the PSA,” Ivan Chernyakhovsky, Sakhalin Energy spokesman, said before the decision. He declined to comment on the ministry’s cancellation of the permit.

The ministry in May also told BP Plc’s Russian venture, OAO TNK-BP holding, it must reach an accord with state-run OAO Gazprom to revive an $18 billion Siberian natural-gas venture. Gazprom is in talks to buy the 50 percent of TNK-BP that BP doesn’t own, Vedomosti reported today, citing Gazprom officials.

Gazprom spokesman Sergei Kupriyanov declined to comment on the Vedomosti report.

Exxon runs the Sakhalin-1 project with partners that include state oil company Rosneft, which holds 20 percent. Rosneft’s participation may mean the government leaves Exxon’s project in peace even after the Sakhalin-1 budget was raised to $17 billion from $12.8 billion, Kommersant newspaper reported today, citing an unidentified government official.

“We have a very good relationship with the Sakhalin authorities and we’ll continue to work through issues as they come up,” Mark Albers, Exxon’s president of development, told reporters during a conference in London today. Exxon is not in danger of losing its Sakhalin-1 license, he said.

Russian Reserves

Sakhalin is one of Russia’s richest petroleum provinces, with as much oil and gas as the North Sea, attracting companies such as Exxon Mobil Corp., BP and India’s Oil & Natural Gas Corp. Shell’s venture is the most advanced.

Shell is drilling in Russian-owned seas north of Japan as dwindling energy supplies force producers to venture into increasingly hostile locations. Costs for Sakhalin-2, the company’s biggest single investment, have doubled to $20 billion, undermining Shell’s effort to convince investors it can replace the oil it pumps, two years after overstating reserves.

The Prosecutor General’s Office two days ago agreed with the Natural Resource Ministry’s conclusion that the original permit for Sakhalin-2’s second phase shouldn’t have been approved, giving it the legal power to annul the 2003 decision.

Sakhalin-2, located seven time zones east of Moscow, is completely foreign-owned, with Shell holding 55 percent, Mitsui Co. 25 percent and Mitsubishi Co. 20 percent. Shell expects deliveries of liquefied natural gas to start in 2008.

Earlier today, Sergei Fyodorov, a Natural Resources Ministry official, said the Exxon and Total projects could also be canceled for violating “technical” requirements of their licenses, Interfax reported.

Total has a production-sharing agreement that governs the Kharyaga oilfield in northern Russia.

Total spokesman Paul Floren declined to comment on the Interfax report.

To contact the reporter on this story: Lucian Kim in Moscow at [email protected]

Last Updated: September 18, 2006 10:21 EDT

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