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Reuters: Shell seeks ‘clear signal’ it is welcome in Russia: demands end to months of sniping and threats by Kremlin-backed officials

Thu Nov 23, 2006 7:35am ET
By Christian Lowe

HELSINKI, Nov 23 (Reuters) – The head of Royal Dutch Shell (RDSa.L: Quote, Profile, Research) in Russia on Thursday demanded an end to months of sniping and threats by Kremlin-backed officials. “We would like to hear clear signals that international oil companies continue to be welcome in Russia,” Chris Finlayson told a business conference in Helsinki, where Russian President Vladimir Putin and European Union leaders will meet on Friday.

Russia’s Natural Resources Ministry and the state agencies for environmental and technical compliance, which all have the power to delay or derail projects, have aimed their toughest rhetoric at the Sakhalin-2 project off Russia’s Pacific coast, which Shell leads.

Projects run by other firms such as Exxon Mobil (XOM.N: Quote, Profile, Research) and BP Plc (BP.L: Quote, Profile, Research) have also been threatened, but Shell’s case grew into a political row that drew complaints and demands for explanation from Brussels, London and The Hague.

Many analysts see the campaign against Shell as part of a wider Kremlin drive to increase state control over the lucrative energy sector.

Shell stepped into the firing line last year when it doubled its cost estimate for the Sakhalin-2 oil and gas scheme to $22 billion, infuriating Russia, which will now have to wait much longer to see returns from the project.

“Recently there have been a lot of discussions about what Russia gets from Shell’s Sakhalin project and whether the deal is fair for Russia,” Finlayson said.

“We believe that, despite the increase in costs, the project is still highly beneficial to Russia.”

The cost increase triggered protracted negotiations with the government, which has to approve the change under the terms of the production sharing agreement governing Sakhalin-2.

It also threw a spanner in the works of an asset swap deal that would have brought Russian gas monopoly Gazprom (GAZP.MM: Quote, Profile, Research) into Sakhalin-2 as a 25 percent shareholder.

With the value of the project lessened, Gazprom may now demand a greater stake, taking some equity from Shell’s partners Mitsui (8031.T: Quote, NEWS, Research) and Mitsubishi (8058.T: Quote, NEWS, Research) as well as 25 percent from Shell’s holding of 55 percent.

“We very much look forward to welcoming Gazprom to the project as a leading shareholder,” Finlayson said.

Asked by Reuters to elaborate, he said: “There’s been no change from the position we’ve stated elsewhere.”

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