The New York Times: Gazprom Reaps the Benefit of Friends in the Kremlin

(Royal Dutch Shell, via PRNewsFoto: Royal Dutch Shell’s $20 billion liquefied natural gas project on Sakhalin Island is scheduled for completion and its first shipment in 2008.)

By ANDREW E. KRAMER
Published: September 23, 2006

MOSCOW, Sept. 22 — Gazprom, the natural gas operator, has benefited handsomely from its position as the monopoly supplier of Russian natural gas to Europe. Now the Kremlin-backed energy company may get a similar role in Asia.

This year Gazprom surpassed BP and Shell to become the second-largest energy company in the world by market capitalization, after Exxon Mobil. The value of its stock, traded in London and on Russian exchanges, doubled in 2005.

This week, Gazprom moved closer to achieving a monopoly on Russian natural gas to be export eastward, with sales of liquefied gas planned as far away as California. The development has far-reaching consequences for the pricing and politics of energy in Asia.

The Russian government threatened to halt work at the Royal Dutch Shell gas field on Sakhalin Island, off the east coast of Siberia, citing environmental shortcomings. The Sakhalin 2 project, a $20 billion development, is the world’s largest liquefied natural gas plant, with planned capacity equal to roughly 7 percent of world supply of L.N.G.

“Russia cannot change the terms, but it can create conditions where the operators will want to renegotiate” Vitaly V. Yermakov, research director for Russian and Caspian energy at Cambridge Energy Research Associates, said in a telephone interview.

“It looks like Shell received an invitation to the negotiating table, under the point of a gun,” he said.

Gazprom, a company with interests so closely linked to the Russian state that a deputy prime minister is chairman of the board, is negotiating for 25 percent of the consortium and a blocking vote on the board, analysts say.

Also this week, Russian regulators vetoed three tanker shipments from a terminal operated by Exxon Mobil on Sakhalin Island and threatened to withdraw a license for Total of France to operate a Siberian oil field.

The actions represent the broadest moves yet against foreign energy companies in Russia under President Vladimir V. Putin, whose government appears to be forcing a renegotiation of terms with foreign oil companies, as has occurred in countries from Venezuela to Kazakhstan.

Mr. Putin is scheduled to meet Saturday with Chancellor Angela Merkel of Germany and President Jacques Chirac of France in Compiègne, a town outside of Paris. Energy is on the agenda, and Mr. Putin is expected to face tough questions over the future of Sakhalin 2.

In another sign of Gazprom’s ambitions in Asia, the company was in buyout talks with three private Russian business partners who operate a large Siberian natural gas field together with BP of Britain, the Vedomosti newspaper reported this week.

While Gazprom inherited a gas monopoly in European Russia, it was far from clear that the same approach would work in eastern Siberia or Sakhalin Island, where the Soviet Union never built a gas pipeline network. Asia was an economic backwater when the European pipes were laid in the 1960’s. After the breakup of the Soviet Union, foreign companies bought licenses in that region; now the largest working gas fields are those of Shell and BP.

Shell’s production-sharing agreement allows it to legally avoid Russian tax and other regulatory jurisdiction. The agreement, however, does not free the company from environmental regulations.

Under the terms, the operating companies would repay the government only after recouping their investment costs; in the meantime, the government would receive only a small royalty. In July 2005, Shell doubled its cost estimate to $20 billion, citing soaring steel prices and appreciation of the ruble. This pushed off by years any significant profits for the Russian government.

“Sakhalin 2 is a relic that contradicts resource nationalism,” Cliff Kupchan, director for Europe and Asia at the Eurasia Group, said of the Russian government’s view of this deal.

Meanwhile, Russia’s energy exports to Asia are tiny now, at 3 percent of overall Russian energy exports. But they are projected to grow to 30 percent within a decade.

Gazprom forced BP’s joint venture, TNK-BP, to give up export rights from a major gas field near the Chinese border. Now Gazprom will export from the field, called Kovytka; TNK-BP is selling only to local customers.

If Gazprom gains at least a blocking stake in the Shell project, then it will control all major gas supplies to Asia from Russia, critics say, with the pricing power and political influence that comes with a monopoly. Gazprom would still compete against liquefied natural gas from the Middle East and other sources.

Russia also aspires to be able to play Europe against Asia in a form of haggling on a grand scale that would be possible only after building enough pipeline capacity to shift supplies between West and East and ensuring that independent producers do not interfere with the strategy.

Mr. Putin made this intention public last spring, when he said Russia would shift natural gas to China if Gazprom met resistance in its efforts to buy pipelines and energy companies in Europe.

“The Russians are playing energy politics,” Caius Rapanu, oil and gas analyst at UralSib, said in a telephone interview. “It’s strong-arm tactics, but it’s warranted, considering the strategy of the Russian government.”

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