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The Mail on Sunday: Double Dutch, but he controls your future

Oil baron… Europe’s future supplies of oil and gas rely on the negotiating skills of Jeroen van der Veer, the chief executive of Royal Dutch Shell

Sunday 29 October 2006

By William Rees-Mogg

What are the greatest problems facing the world? Perhaps one should put global warming first; that is largely being caused by mankind’s unquenchable appetite for carbon energy, particularly the hydrocarbons of oil and gas. Perhaps the second great anxiety should be the threat of war, or the actual war in the Middle East.
That has tribal, religious and economic causes, but the economic issue is oil.

The third issue is globalisation itself, which is changing all the major relationships of the world economy. Globalisation has been made possible by the new electronic communications, the computer, the internet; the energy that drives this global system is largely generated by oil.

We are still living in the hydrocarbon age of transport. Oil is a global commodity, produced, refined and distributed by global companies, many of which behave more like governments than private companies.

Yet very few of us have more than the slightest knowledge of the mysterious world of oil, although our future depends upon it. How many people have ever heard of Jeroen van der Veer, the chief executive of Royal Dutch Shell? He sounds like a portrait by Rembrandt.

In terms of the impact his decisions have on our lives, Mr van der Veer is one thousand times more important than Madonna. Yet one thousand people would recognise her for every one who could place him.

He has just returned from a visit to Russia where he had to negotiate a dispute with the Russian government over Sakhalin-2. One can say Sakhalin-2 itself has not become a household name. I have never heard it referred to on Radio 4’s Today programme, though, obviously, I may have missed it. Few commuters, coming home from the office, rush to turn on the television news to find out the latest stage of the Sakhalin-2 negotiations.

The whole balance of power between the European Union and Russia has been altered in the past ten years by one simple fact: Russia has the oil and gas and the EU does not. This makes every step in oil negotiations between Europe and Russia of critical importance to Europe’s future.

Russia is the provider; Europe is the consumer. If one goes to Istanbul one can see the great tankers queuing up in the Bosporus, taking Russian oil to the West. Apart from the tankers, pipelines have been built, other pipelines are under construction, yet more pipelines are being planned.

The future of Europe’s energy supply depends on Russia, and the Russians know how strong their bargaining position is. They have already used their leverage to put pressure on Ukraine and Georgia.

The Sakhalin-2 project is no more than an important detail of this EU-Russian relationship, but it could be an indicative one. The Western Pacific island of Sakhalin was taken from Japan by the Soviet Union in 1945. No one was then thinking about offshore oil, but following the collapse of the USSR in 1991 the island’s extensive oil and gas reserves have been exploited.

Sakhalin-2, the latest project to exploit these reserves, is 55 per cent owned by Royal Dutch Shell and is due for its first deliveries of liquefied natural gas in 2008. The total investment will come to £12billion ($22.5 billion), which is quite big, even for Shell.

The current negotiations are basically about Russia’s share of the profit from Sakhalin-2, but alleged environmental damage has become a bargaining chip. Dmitri Belanovich is the local regional head of Russia’s environmental monitoring agency. He claims £56 million ($100 million) of damage has been done to the environment, primarily to forests.

As a result, Yuri Trutnev, the Russian Minister of National Resources, has accused Royal Dutch Shell of breaking at least five environmental laws. These alleged breaches are punishable under criminal law. One of the statutes has a maximum penalty of up to seven years in a Russian prison. There is also the threat of the withdrawal of a water licence essential to the continuation of the development.

Mr van der Veer came back from Russia feeling optimistic. He must also have been cheered up by being able to report excellent quarterly results. The company’s pre-tax profits for the three months to September came to £6 billion ($10.8 billion).

Yet the negotiation is far from settled. All he could report was that: ‘We hope to be able to resolve issues and misunderstandings through discussions. I see the environmental and economic issues. For both, I see pathways forward.

The big oil bosses have learnt the language of diplomacy. All important oil projects involve very large investments — £12 billion is, nevertheless, an extremely large sum. Almost all these projects involve partnerships. All involve environmental problems. All require estimates of probable yields, which themselves depend on forecasts of the volatile price of oil. All of them depend on negotiations with governments.

From the Russian point of view, there may be a reasonable negotiating point. The cost of Sakhalin-2 has risen above the original estimate. This is likely to happen in large and challenging projects of this kind. The original contract provided that Royal Dutch Shell should recover its costs before paying the Russians their generous share. The increase in costs does, therefore, involve deferment of the payment to Russia. The Russians want to renegotiate what they now regard as onerous terms. All this is normal commercial bargaining. However, one comes back to Europe’s big worry. Even though Russia may have a legitimate negotiating point, there is the appearance that the Russian government is using the environmental law to strengthen its commercial negotiating position, after a massive investment has already been made.

The Russian oligarchs may have been treated in the same way, but they had cheated the Russian state at its weakest moment. No such argument applies to Royal Dutch Shell, which is delivering what it promised, a reasonable bargain of advantage to Russia. Similar questions have arisen in other European oil negotiations with Russia, particularly over the Baltic pipeline, which Putin negotiated with the former German Chancellor Gerhard Schroder.

In that case, the proposed pipeline was taken under the Baltic, straight to Germany but bypassing Poland. The Poles reasonably feel that this weakens their bargaining position to the advantage of Germany and Russia. All Poles are historically nervous of agreements between Germany and Russia at their expense.

Sakhalin-2 is only one minor example of the ruthless manoeuvring in the scramble for oil. Perhaps Russia is overplaying a strong hand, but Putin wants to regain superpower influence for Russia. This may only be the movement of a pawn on the giant chessboard of the oil world. But for Britain the future supply of oil — of which Sakhalin-2 could be a small part – is a matter of economic survival.

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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