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Investors Chronicle: OIL MAJORS FACE RUSSIAN PRESSURE

By Daniel O’Sullivan
Oil & Gas 

A CHILL WIND IS blowing over supermajor oil companies working on large hydrocarbon projects in Russia under agreements struck in the 1990s. When these deals were signed, a weak Russian government desperately wanted to attract foreign investment into the sector. So the agreements typically granted the producing company a raft of fiscal privileges, including full cost recovery before any profit split with the state.

But while the natural resources ministry denies that it is seeking to abrogate agreements completely, widespread licence violations in terms of both environmental and developmental obligations are allowing it to put pressure on the companies in question. And the implication is that deals will be ‘rebalanced’ in favour of a now much stronger state. 

Shell is the most obvious j example, having infuriated the government with a doubling of costs on its Sakhalin Energy liquefied natural gas (LNG) project in the Russian Far East , to some $20bn (£lO.5bn). Under the original deal terms, f this would mean the state waiting a lot longer for royalties.

However, Shell’s environmental failings across the project have given the state a big stick with which to beat it, with the prosecutor general set to decide on possible criminal charges within a fortnight. At the very least, Shell is looking at large fines. What’s more, with the potential sanction of complete licence revocation hanging over it, Shell might grant state gas company Gazprom a larger economic interest in the scheme than it previously envisaged.

Gazrom also covets a share in the massive Kovykta gasfield, in Siberia, operated by a consortium led by BP’s Russian joint venture TNK-BP. Again, licence violations – this time connected with agreed development milestones – are being held over the company to encourage it to cede some of its interest to the state, and January has been mentioned as a window for licence review and possible revocation.

Meanwhile, French company Total is also under fire, with similar milestone failings at its Kharyaga development in the Far North. According to government spokesmen, the only thing preventing regulatory investigation into ExxonMobil’s Sakhalin 1 project is manpower being tied up in the other probes. At l,868p, we reiterate our sell advice on Shell (RDSB), and see BP as fairly priced at 590p.

3rd November 2006

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