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The Scotsman: Russia builds pressure on Royal Dutch Shell, Exxon projects

By Dmitry Zhdannikov

MOSCOW (Reuters) – Russia launched a new broadside on Monday against Royal Dutch Shell and Exxon Mobil , showing the Kremlin’s resolve to regain control of huge oil and gas projects they run off the Pacific island of Sakhalin.

The Resources Ministry said it had revoked its own ecological approvals for Shell’s Sakhalin-2 project, which could further delay the $20 billion (10.6 billion pound) development.

Meanwhile another official, from a regional environmental watchdog, questioned the ecological and technical readiness of Exxon Mobil’s oil export terminal on the Pacific, weeks before the launch of the $12-billion project.

Investors said the concerted campaign to force the oil majors to give up part or all of their advantageous production sharing agreements (PSAs) reflected a wider trend of resource nationalism in countries from Latin America to Africa.

Monday’s developments also convinced investors that Moscow is prepared to use the aggressive tactics it last deployed to break up Russian oil firm YUKOS, with bureaucrats seizing on environmental concerns as a pretext to attack the PSAs.

“I don’t rule out that there may be some ecological problems at these PSA projects. But these methods cannot be used to work with big Western investors,” said Steven Dashevsky, chief analyst at Moscow’s Aton brokerage.

The Resources Ministry issued its statement on Shell shortly after the Prosecutor General’s Office, previously silent on PSAs, said it supported revoking the ecological approvals. And a low-ranking official from the Resources Ministry said all PSAs in Russia should be effectively scrapped.

“It is a low-quality PR campaign. It is definitely bad for the investment climate,” Dashevsky said.

Yelena Anankina, an oil industry analyst at ratings agency Standard & Poor’s, said it was hard to estimate how seriously to take the threats, as zealous bureaucrats could be seeking to win favour with the Kremlin by criticising the projects.

“In Kazakhstan ecological issues led to serious implications and some firms had to cut production,” she said.

“It remains to be seen whether similar things can happen in Russia. It will depend on the talks behind the scenes, but it is obvious that the state has a strategy to boost its role.”

Exxon and Shell said they were fully complying with Russian regulations and hoped to resolve the differences soon. Their shares were little moved on Monday’s news.


Russia signed three PSAs in the 1990s, with Exxon and Shell on Sakhalin and with Total in Siberia, to attract foreign investment at a time of very low oil prices.

The deals can only be scrapped by mutual agreement or if the operator decides to drop the project. All disputes must be heard by international courts.

PSAs guarantee a stable tax regime over the projects’ life but as oil prices rose and the Kremlin re-discovered a taste for control of the oil industry, they have come under attack.

Sakhalin-2 is already producing oil as part of its first phase and plans to more than double output. Phase-2 also involves building the world’s biggest liquefied natural gas (LNG) plant.

“It does not mean that the project has to be closed. We simply need to think again about the progress of phase-2 and about a new ecological approval,” Resources Ministry spokesman Rinat Gizatulin said. He did not say how long this would take.

Natural Resources Minister Yuri Trutnev said last week the pressure on Shell was the result of a $10 billion cost overrun, which also forced the postponement of the first LNG shipments.

“I’m certainly not thinking this is a disaster, it’s certainly not from a portfolio point of view,” said Oswald Clint, analyst at Sanford Bernstein in London.

“It may just be some muscle flexing by the Russians, by Gazprom and (President Vladimir) Putin to try and secure a faster entry to the project,” he added.

Gas monopoly Gazprom has agreed to secure 25 percent in Sakhalin-2, but talks have been stuck since Shell announced the cost overrun and project delays to summer 2008.

Exxon is also a few months behind its initial schedule with the launch of the 250,000-barrel per day terminal, part of its $12 billion Sakhalin-1 project.

Interfax on Monday quoted the head of Russia’s environmental watchdog in the Far East, Alexander Poleshchyuk, as saying the terminal should undergo more checks before its launch.

Exxon has already been told it would not be allowed to book new reserves near existing deposits of Sakhalin-1. Gazprom also opposes Exxon’s plan to build a gas pipeline to China from Sakhalin as it has a bigger rival project.

Exxon warned Russia this month to honour the deal or risk spooking other foreign investors in the country.

(Additional reporting by Jonathan Cable in London)

(c) Reuters 2006. All rights reserved.

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