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The Times: Shell needs to oil its Kremlin diplomacy

Putin

October 05, 2006

WHILE BP’s mishandling of public opinion and the political process in the US has badly damaged its reputation in the short term, Shell’s misreading of government relations in Russia threatens to do it more lasting damage. For the economics of its $20 billion Sakhalin-2 gasfield are in doubt. And while Russia’s treatment of Shell may have been arbitrary, highhanded and duplicitous, it has not been surprising.

Vladimir Putin views energy assets as his predecessors once regarded nuclear warheads. They are the means of advancing Russia’s strategic ambitions in the world. (Ironically, George W. Bush, the first MBA president, has not used Corporate America but the Pentagon to define his foreign policy; Mr Putin, the former KGB agent, has sought to advance his international agenda by relying on the soft power of Russia’s big business and natural wealth.) President Putin seems to want Russia to maintain majority control of its oil and gas industry. Such economic nationalism is not new. What has changed is that, courtesy of a higher oil price, Russia is no longer as reliant as it once was on foreign investors to explore and develop oil and gasfields.
 
Shell is not the only one that will have to deal with this new reality. ExxonMobil has been sent the same message on its Sakhalin investment: scale back costs or sell out. BP may find it comes under pressure to renegotiate terms of the BP-TNK joint venture.

But given that Russia has shown both the will and the werewithal to regain control of its natural resources, Shell’s decision last year to double the projected costs of developing the Sakhalin-2 field from $10 billion to $20 billion played into the Kremlin’s hands. Not only did it infuriate Moscow, but it gave Mr Putin at least a rhetorical cause for rewriting the rules of the contract retrospectively.

To be clear, Mr Putin likes to abide by the laws of global capitalism as and when it suits him. Just a week ago he was in France complaining that a Russian company’s 5 per cent investment in EADS should guarantee it a seat on the European aerospace and defence manufacturer’s board. He is ripping up commercial contracts on the one hand, championing investor rights on the other. But Shell’s business is geopolitical. Its job is to handle government relations. Jeroen van der Veer, its boss, seems to have done a worse job of handling the arbitrary Mr Putin than BP’s Lord Browne of Madingley has done of placating the more irascible members of the US Congress.

http://www.timesonline.co.uk/article/0,,630-2389293,00.html 

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