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MosNews: Russia to Honor Existing PSAs — Economy Minister

Created: 20.09.2006 10:51 MSK (GMT +3)

Russian Economy Minister German Gref said on Tuesday, Sept. 20, that the country may stop using production sharing agreements (PSA) for mineral deposits in the future but will honor the current contracts. Gref was talking in the wake of environmental suspension of Shell-led Sakhalin-2 oil and gas project in the Far East.

German Gref also said the government could not support all the spending proposals made by foreign companies that run Sakhalin-2 project. The project costs have already doubled to $20 billion, prompting unhappiness from the government. As MosNews has reported, on Monday evening Russia’s Natural Resources Ministry annulled its approval of environmental probe at the project, which was conducted in 2003.

The Economy Minister said PSA schemes, which were developed in the mid-1990s as a way to attract investment when the state was hard pressed for financing, could be discarded in the future. “I believe that the investment climate in the country today and the external situation are such that we can cope without this regime and will work in standard conditions,” Gref said, quoted by RIA Novosti. “We will obviously ensure that current agreements are honored.”

The agreements made foreign investors in Russia exempt from nearly all taxes, but some politicians and economists have argued the arrangements have become outdated as Russia enjoys the boons of an economic upturn largely driven by high commodity prices. Royal Dutch Shell and ExxonMobil are working under PSAs on the island of Sakhalin off Russia’s Pacific coast and France’s Total is running another at Kharyaginsk oil field in Siberia.

This is not the first time that the Russia Economy Ministry is defending the previously-signed PSAs. On September 6 Deputy Economy Minister Kirill Androsov said: “Every signed PSA is a law. So far, we have not terminated a single PSA, and I see no reason for doing that.”

The words of Russian official come among all the concern and protests that were raised by Russia’s decision to recall the environmental permit on the project. Japan’s would-be Prime Minister Shinzo Abe already said that delays on the project could seriously harm Japan-Russia relations. Japan really counts on deliveries of liquefied natural gas (LNG) that are supposed to start coming from Sakhalin-2 in 2008. Britain expressed protest over Russian authorities’ actions and European Union Energy Commissioner Andris Pielbags offered his strong criticism.

Meanwhile, an environmental watchdog began inspecting Sakhalin Energy’s alleged violations of ecological legislation and project specifications on July 25. The Federal Service for the Oversight of Natural Resources (Rosprirodnadzor) said its experts found the company had failed to build anti-erosion facilities and had registered excessive disposal of industrial wastewater from the Molikpaq offshore production platform.

“In addition, Sakhalin Energy has consistently violated the schedule for submitting statistical reports on water consumption,” the agency said. “In 2005, the Federal Service for the Oversight of Natural Resources registered excessive disposal of industrial wastewater from the Molikpaq platform, which is a violation of the Russian Water Code.”

It also said Sakhalin Energy had failed to submit reports on all prospecting and geological work on time. If a court upholds the service’s demands, all activity under the Sakhalin II project will be prohibited until the state ecological probe issues a revised conclusion and all environmental violations are eliminated.

Despite the fact that some analysts view environmental claims as no more than a form of pressure on Royal Dutch/Shell to conclude an asset swap deal with Russia’s gas giant Gazprom, environmental concerns certainly have some ground. Earlier this year, environmental concerns prompted the European Bank of Reconstruction and Development to withhold a loan for a pipeline that is to be built from the Molikpaq platform to the shore. The EBRD is known for thoroughly checking all projects for compliance with environmental protection regulations.

Another problem with Sakhalin-2 project are major cost overruns. Natural Resources Minister Yuri Trutnev said on Sept. 12 that Russia would be looking to protect itself against losses on Sakhalin II. “Operators’ plans to increase reimbursable costs are not acceptable to the Russian side,” he said. “We cannot avoid reacting. If these plans are implemented, the Russian Federation will lose some $10 billion.”

Economy Minister Gref was more conciliatory, but he also offered some criticism. “We must search for compromises on the Sakhalin II project,” he said. “We cannot support all investors’ proposals on increasing costs. We believe some of them are poorly developed and there is still a lot to be worked on.”

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