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Times Online: Russia wins with the hardline

December 11, 2006
Michael Binyon in Moscow
 
Royal Dutch Shell’s decision to hand over control of the $22 billion energy project in Sakhalin to Russia’s state monopoly Gazprom is a victory for Russia’s new hardline policy on energy. It is also a warning to Western business that investment in Putin’s Russia still carries real risks.
 
 
Shell’s decision to reduce its 55 per cent stake in the huge Sakhalin-2 project comes after months of growing pressure on the energy multinational. It has been clear for months the Moscow was determined to seize back control of its energy assets and was looking for any excuse to break the deal made a decade ago. This was a production-sharing agreement, which gave Shell control of the energy assets and did not begin to pay Russia income from Sakhalin’s gas production until Shell has covered its exploration costs.

Russia made this agreement at a time when it did not have the capital or the expertise to go ahead with the project alone. Under Putin, however, energy has been seen as a strategic asset, and the Kremlin has slowly been renationalising — by various means — gas and oil assets that were sold off in the Yeltsin era for far less than their real value.

Shell’s announcement that it has miscalculated exploration costs was the excuse Moscow needed to renegotiate the agreement. Shell raised the costs from $10 billion to $22 billion. Gazprom was outraged. And a campaign of pressure promptly began: Shell was accused of environmental damage and threatened with court actions, prosecution and petty harassment.

Its capitulation was probably invitable. The Kremlin has succeeded in its aim – but at a cost. The message for other foreign investors is a chilling one: even deals that appear secure can go wrong if Russia decides to change the terms. Few multinationals will now think of further investment in giant projects, especially energy. Pressure is likely to rise on BP, which still has a big stake. The Yukos affair was already a warning shot that the Kremlin wanted to win back control of Russia’s energy; the Shell affair confirms that it will use any methods available to do so.
 
http://business.timesonline.co.uk/article/0,,9072-2498625,00.html

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