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St Petersburg Times: Kremlin Rejects Shelling Out More For Sakhalin-2

Issue #1210(76), Friday, October 6, 2006
By Miriam Elder
Staff Writer
MOSCOW —A top Kremlin economic adviser on Wednesday said Shell had broken its agreement with the government to develop Sakhalin-2 when it doubled the cost estimate for the project to $20 billion, and warned that the government would never accept the increase.”You know which side changed the conditions of development” when it asked to double the project’s costs, Arkady Dvorkovich, head of the Presidential Experts’ Council, told an investment conference.

“It was clear from the beginning that the Russian side was never going to cover this,” he said.

Shell announced last year that it would cost $20 billion to develop the Sakhalin-2 oil and gas project, which it operates under a production sharing agreement, or PSA, with the government. The project has recently come under fire in what observers say is a Kremlin push to sweeten the terms for state-run Gazprom to take a share. With a direct stake in the project, the state could see quicker revenue, since under the PSA it has to wait for all investments to be recouped before reaping any profits.

Dvorkovich denied that threats to revoke the environmental approval for the project were part of a wider strategy to corral energy projects into Kremlin control. In recent weeks, the government has said it will not accept price increases at the ExxonMobil-led Sakhalin-1 project and has accused TNK-BP of environmental violations at its Kovykta field in east Siberia.

“There is no [such] campaign,” he said. “There are no intentions to completely hand over the energy sector, including PSAs, to state companies.”

Speaking on the sidelines of an investment conference organized by the Russo-British Chamber of Commerce, Dvorkovich said, “The PSAs are safe — if the agreement, if legislation, is being followed.”

State officials have insisted they are merely trying to ensure that Western companies follow the rules.

Konstantin Panin, vice president of Shell Exploration and Production, was one of several speakers at the conference to criticize the state for failing to make that message clear.

“There must be clear rules,” Panin said. “There must be confidence that once the rules of the game are established, they will be adhered to.”

“One can avoid [conspiracy theories] easily by entering into a dialogue with the company,” he told the conference.

State officials have recently declined Shell’s requests to hold meetings, he said. Sakhalin Energy, the company that operates the project on behalf of Shell, Mitsui and Mitsubishi, has made similar claims.

British Ambassador Anthony Brenton was more skeptical that a wider government push wasn’t under way.

“It feels like a more wide-ranging pressure,” he said on the sidelines of the conference, which was held at the Russian Chamber of Commerce and Industry, or RCCI, and celebrated the 90th anniversary of the Russo-British Chamber of Commerce.

BP is the latest foreign oil major to come to Russia, creating the country’s third-largest oil producer through its joint venture with the Tyumen Oil Company, or TNK, in 2003.

Gazprom has said it would be willing to buy shares from the company’s Russian partners, although TNK-BP CEO Robert Dudley has said he has seen no sign that the partners, Alfa Group and Access-Renova, were looking to sell.

Dealing with Russian companies has been “BP’s choice as an approach to do business in Russia, which I think will prove to be right,” BP Russia president Richard Spies told the conference.

President Vladimir Putin has signaled his intention to reassert state control over the energy sector, calling the industry the “holy of holies,” as high oil prices have driven the country’s economic growth in the last few years.

State-run Gazprom and Rosneft have led the charge, acquiring plum privately owned assets — from Yukos’ main production unit, Yuganskneftegaz, to Roman Abramovich’s Sibneft.

Gazprom deputy CEO Alexander Medvedev told the conference that the company was still in talks with Shell over an asset swap that would see it buy into Sakhalin-2, but denied it was seeking a controlling stake. “We are continuing negotiations with Shell, though they are somewhat protracted, on joining Sakhalin-2,” he said. Talks on Gazprom taking a 25 percent stake in the venture in exchange for giving Shell a 50 percent stake in its Zapolyarnoye field in west Siberia stalled after Shell announced the cost increase last year.

“The question of a controlling stake is not under discussion,” Medvedev said.

From now on, Shell’s Panin said, oil majors will have to accept that Russian companies will hold a 51 percent stake in major oil projects. Shell is “ready for that,” he said.

Charles Ryan, CEO of Deutsche UFG, echoed the sentiments of many speakers when he said that the government had failed to outline its intentions clearly. “It seems to be entirely normal that Russia should want to control its hydrocarbons,” he told the conference. Since losing its status as a superpower, its standing as a top oil and gas producer is the best way to ensure it remains in the world’s most influential clubs, he said.

But, “it has to be more careful and more clear” in its message, he said.

Russia was “actually extremely liberal” in allowing foreign ownership of energy projects, Ryan said, pointing to the fact that only a handful of countries — the United States, Canada and Britain among them — did the same. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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