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MosNews: Russia to Gain Billions from Production Sharing Agreements — Official

Exxon Sakhalin Project

(Photo from www.exxonmobil.com)

02.11.2006 11:42 MSK (GMT +3)

A top Russian government official said on Wednesday, Nov. 1, that oil and gas projects, which are being implemented in Russia’s Arctic and the Far East under production sharing agreements (PSA) will yield billions of dollars for the country. Devised in the 1990s, when oil prices were much lower and Russian budget and Russian companies had no free money to invest in such projects themselves, PSAs offered investors major tax benefits, which provided a kind of risk bonus for investing in Russia.

Deputy Industry and Energy Minister Andrei Dementyev said that Sakhalin-1 oil and gas project, off Russia’s Pacific coast, will bring in an estimated $52.2 billion for the budget by 2054, when the project is scheduled to end.

The project is operated by U.S. oil major Exxon Neftegas Limited. Apart from the American giant, the Sakhalin-1 international consortium comprises Russia’s state-controlled Rosneft (20 percent), India’s ONGC (20 percent), and Japan’s Sodeco (30 percent).

“Calculations are based on the pessimistic scenario of a $35-per-barrel oil price,” Dementyev said, quoted by RIA Novosti.

The deputy minister said the project’s implementation yielded $101 million by the end of 2005, including $28 million for the federal budget and $73 million for the budget of the Sakhalin Region.

Dementyev said the Sakhalin-1 project was expected to produce about 258 million metric tons (1.89 billion barrels) of oil and 356 billion cubic meters of gas over its lifespan.

Dementyev said the Sakhalin-2 oil and gas project in Russia’s Far East was expected to yield $50.1 billion over its lifespan (until 2045), considering a pessimistic oil price scenario of $34 per barrel.

The Sakhalin-2 project comprises an oil field with associated gas, a natural gas field with associated condensate production, a pipeline, a liquefied natural gas plant and an LNG export terminal. The two fields hold reserves totaling 150 million metric tons (1.1 billion barrels) of oil and 500 billion cubic meters of natural gas.

Royal Dutch/Shell holds a controlling 55 percent stake in Sakhalin Energy, the operator of the Sakhalin-2 project, while Japan’s Mitsui and Mitsubishi own 25 percent and 20 percent, respectively.

Dementyev said that Sakhalin-2 project yielded $350.3 million for Russia by the end of 2005, including $141.6 million for the federal budget and $208.7 million for the regional budget.

Dementyev also said revenues from the project to develop the Kharyaga deposit in northern Russia will total an estimated $2.58 billion by the end of its implementation (2031), considering a pessimistic oil price scenario of $32 per barrel.

The Kharyaga deposit is being developed by French oil major Total.

Contracts signed under production-sharing terms totaled $16.7 billion over the term of their implementation, including $9.4 billion worth of contracts concluded with Russian companies, Dementyev said.

Dementyev said the value of contracts signed with Russian companies totaled $3.6 billion under the Sakhalin-1 project, $5.3 billion under the Sakhalin-2 project, and $462.5 million for the Kharyaga deposit.

“Assistance in involving Russian enterprises in the implementation of existing production-sharing agreements must be a priority task,” Dementyev said.

This is the first time that Russian officials have spoken favorably about production sharing agreements that were signed with Western oil majors. The recent sentiment among the Russian authorities has been that PSAs only benefit international companies, which are enjoying tax breaks, while the Russian state is getting no profit from the projects.

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