Reuters: Dutch PM wants answers on Sakhalin

Fri Sep 22, 2006 2:21 PM BST 
By Tom Miles

MOSCOW (Reuters) – Dutch Prime Minister Jan Peter Balkenende phoned Russian President Vladimir Putin late on Thursday to demand an explanation for Russia’s tough line on a project run by British-Dutch major Royal Dutch Shell (RDSa.L: Quote, Profile, Research).

Russia withdrew ecological permits for Shell’s Sakhalin-2 venture this week because the firm doubled the estimate of costs for the project to $20 billion (10.5 billion pounds), infuriating the Kremlin and gas monopoly Gazprom (GAZP.MM: Quote, Profile, Research), which wants to join Sakhalin-2.

Shell, which owns 55 percent of Sakhalin-2, has said the cancelled approval may mean more delays in liquefied natural gas (LNG) supplies to Japan and the United States and more costs.

Foreign Minister Margaret Beckett has already raised the issue with her counterpart Sergei Lavrov, but Russia’s Natural Resources Ministry has said it refuses to accept the cost increases proposed by Shell.

The Kremlin said in a statement that Putin and Balkenende had discussed practical aspects of bilateral relations in the light of agreements reached during Putin’s visit to the Netherlands in November last year.

During that trip, Putin slammed Shell at a meeting with Dutch businessmen and spent more than 30 minutes criticising the firm’s cost overruns, according to a Russian newspaper report.

The Kremlin statement said that during their phone call the two leaders “expressed satisfaction at the steady development of cooperation” in energy and other areas, which would be discussed at upcoming intergovernmental meetings.

“Both leaders expressed their confidence that the various issues that inevitably come up during the implementation of large-scale joint projects will be resolved in constructive fashion and in the spirit of understanding that characterises the relations between the two countries,” it said.

A spokesman for Balkenende said Sakhalin was the main subject of discussion and described the conversation as “constructive.”

ANGRY GAZPROM

Concern about Russia’s crackdown has also been voiced by Japan, which expects to be the major customer for the LNG from Sakhalin-2. Two Japanese firms, Mitsui (8031.T: Quote, NEWS, Research) and Mitsubishi (8058.T: Quote, NEWS, Research), are also Shell’s minority partners in Sakhalin-2.

But Russia says it will not tolerate increases in the cost of production sharing agreements (PSAs) such as Sakhalin-2 or the neighbouring Sakhalin-1 project operated by U.S. oil major Exxon Mobil (XOM.N: Quote, Profile, Research), since the Kremlin will only see revenue from the PSAs once their costs are covered.
However some analysts say the tough stance on the PSAs is just a continuation of Putin’s policy of regaining control over the energy sector, which has driven a massive revival of Russia’s economy since he came to power in 2000.

“PSAs are now looked upon with disfavour by the government and are seen as relics of a past age when Russia was deemed hugely risky by western oil companies and PSAs were the only way to encourage them to invest,” analysts at Deutsche UFG said in written research.

Shell’s soaring costs has also angered Gazprom, which agreed in principle to take a 25 percent stake in Sakhalin-2 just days before the budget rocketed from $10 billion to $20 billion.

Talks on that deal have now stalled while Russia and Shell struggle to agree on what the final budget should be.

Analysts at Deutsche UFG said Russia would not go as far as to take the Sakhalin-2 licence away from Shell, but the firm might have to swallow some of the cost overrun to keep the government happy and offer Gazprom better swap terms.

Shell has said it is confident Russia will approve the new budget, which was swelled by the rising costs of metals, the strengthening rouble and the cost of contractors.

(Additional reporting by Harro Tenwolde in Amsterdam)

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