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Financial Times: US shrugs off setback over gas supplies

By FT Reporters
Published: October 10 2006 21:23 | Last updated: October 10 2006 21:23

US officials said on Tuesday they were continuing to work towards agreement on Russian entry to the World Trade Organisation, in spite of Gazprom’s decision to develop the huge Shtokman natural gas field on its own and snub potential foreign partners.

The Shtokman decision – which will see Gazprom selling most of the gas to Europe and not the US, as originally planned – has cast a shadow over US-Russia WTO talks in Geneva this week.

But officials insisted both sides still hoped to conclude an accord well ahead of next month’s summit of the Asia-Pacific Economic Co-operation (Apec) forum, which will be attended by the US and Russian presidents.

“Our focus is to get the deal done,” a spokesman for the US trade representative’s office said. “There is a general goal to try to have this done by the end of the month.”

An expected bilateral deal with the US, the last big economy whose agreement is needed to clear the way for Russian WTO membership, foundered at July’s Group of Eight summit in St Petersburg after last-minute arguments over US meat exports to ­Russia.

Membership would bring Moscow under the ­umbrella of the multilateral trading system and enhance its international standing.

Analysts said Gazprom’s decision on Shtokman was almost certainly linked to frustration at what Moscow saw as US foot-dragging on the WTO deal and a broader increase in perceived US hostility towards Russia.

While the Kremlin has denied linking the two issues, most observers believe they became heavily entangled this summer.

Some senior Moscow officials privately accused Washington of deliberately sabotaging talks in July because it no longer wanted a WTO deal.

Steven Dashevsky, head of research at Aton Capital, said that Shtokman, because of its huge scale, was “always going to be a political issue”.

“And, given the lack of progress in negotiations with the Americans on Shtokman itself and on WTO accession, I think Russia made a reasonable diplomatic decision by basically deciding not to allow any foreign partners.”

Russian President Vladimir Putin confirmed yesterday that Gazprom would have “100 per cent control” of Shtokman’s development but said it “had not ruled out” foreign companies being invited to take part in the project.

Russian officials indicated he was referring to technical assistance and subcontracting work that could be provided by foreign companies, as spelled out by Gazprom on Monday.

That may be little consolation to five shortlisted groups – Norway’s Norsk Hydro and Statoil, France’s Total and Chevron and ConocoPhillips of the US – that had hoped for equity stakes in Shtokman.

But analysts added that the explanation from Alexei Miller, Gazprom’s chief executive, that the shortlisted foreign partners had not offered suitable assets in exchange, might contain some truth.

People familiar with the Kremlin’s thinking said officials were determined to obtain the best possible deal for Russia from any future energy agreements.

They believed that many previous deals – notably three production-sharing agreements (PSAs) signed in the 1990s – had turned out to be highly unfavourable to Russia.

PSAs are exempt from normal tax requirements, with Russia instead receiving a share of the oil and gas produced once foreign partners have recouped all their development costs.

Ongoing PSAs include Sakhalin-2, the natural gas project led by Royal Dutch Shell which has come under fire for alleged environmental violations after Shell doubled the estimated project costs, thereby delaying the date at which Russia would start to reap any benefit.

Industry insiders said some shortlisted Shtokman partners had recently demanded further legal safeguards and guarantees on dispute-resolution, partly because of nervousness sparked by the pressure on Sakhalin-2.

Analysts also said foreign partners were under shareholder pressure not to pay too dearly for involvement in Shtokman – given the delays and cost overruns common in big projects, plus the perceived risks of working with Russia – and had shied away from offering their best assets.

Reporting by Neil Buckley in Moscow, Frances Williams in Geneva, Alan Beattie in London and Hugh Williamson in Dresden

Copyright The Financial Times Limited 2006

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