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Daily Telegraph: Shell losing in Russian battle for Sakhalin-2

By Russell Hotten, Industry Editor
Last Updated: 1:20am GMT 12/12/2006

Sakhalin is a remote, austere island in the furthermost reaches of Russia – a haven for wildlife, and home to one of the richest oil and gas reserves on the globe.

And in the past few months these two issues have clashed to cause an international political storm that looks likely to do lasting damage to Russia’s relations with western companies. For months Shell has been bombarded with threats from Russian state agencies that it has breached environmental rules.

Shell says that it has complied to the letter with all requests to improve conditions, and yet still more complaints come.

Few people in the west doubt that this is part of Moscow’s plan to take back control of the project, signed in the mid-1990s. And it looks like Moscow has succeeded. The Sakhalin-2 oil and gas development is a huge investment for Shell and its partners, about $20bn (£10.2bn). But once Moscow turned up the heat, the only thing the company could do was renegotiate the best deal in the circumstances.

Stephen O’Sullivan, analyst at Deutsche Bank says: “Having 50pc minus one share in a project that can expand and develop is better than having control of a project that is going nowhere.”

Other oil firms such as BP and Exxon Mobil have faced similar environmental complaints. Moscow also seems to be using claims for back taxes as a lever.

The campaign is seen as an attempt to force them to accept a greater role for state-controlled companies such as Gazprom and oil firm Rosneft. Russia does not want foreigners controlling strategic assets. The biggest foreign-owned project after Sakhalin-2 is BP’s joint venture with Russia’s TNK. Some analysts believe TNK-BP’s Russian shareholders will sell out to the state in 2007, undermining BP’s position. TNK-BP has also been under pressure over its vast Kovykta gas field, in which Gazprom wants a stake.

Russian officials admit that it is only right that Moscow should have control of strategic assets. “What country would not want such control,” an aide to president Vladimir Putin said yesterday. But he also promised that existing agreements would not be torn up, a view that Shell or BP might privately take issue with.

Shell and BP may still be in a strong position. Gazprom and Rosneft cannot develop these huge projects without western expertise. But creeping state control will make future investors wary. Russia, at least to oil companies, does not appear to have acted by the book.

 

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