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The Wall Street Journal: Shell/Gazprom: ‘Bullies often get what they want…’

Tuesday 12 December 2006

Bullies often get what they want, and the Russian state is no exception. Moscow appears to have finally managed to cut Gazprom, the Russian state gas monopoly, into Royal Dutch Shell’s Sakhalin-2 liquid natural-gas project. The terms aren’t clear, but Gazprom will end up controlling the $20 billion gas project — the biggest of its kind in Russia — in return for some oil assets and possibly some cash, according to reports. Shell and its two Japanese partners, Mitsui and Mitsubishi, will become minority investors in Sakhalin.

Shell doesn’t have much choice. The Sakhalin project is the only big energy project left with no Russian partner. This is a product of history: Shell negotiated the production-sharing agreement in the 1990s when Russia was weak and oil prices low. Under the terms of the agreements, the Russian state doesn’t get a cut until foreign oil companies have recovered the cost of their investment. In the case of Sakhalin, where investment costs have doubled to $20 billion, the Russians were going to have to wait an awfully long time.

At least Russia has not torn up the production-sharing agreement altogether, as some feared. Instead, it has followed the all-too-familiar pattern of sticking to the letter — if not the spirit — of the law, as it did in the Yukos affair. Although Shell had already signed a memorandum of understanding with Gazprom in July 2005, the pair couldn’t agree on a deal after the cost overruns. Moscow put pressure on Shell by withdrawing its environmental permits, effectively halting work on the project.

Foreign oil-and-gas companies are getting wise to Russia’s methods. The Sakhalin events might make them queasy about investing in Russia, but the allure is still too great. Just look at ENI, the Italian oil and gas company. It has signed a deal with Gazprom to jointly buy upstream assets in Russia, among other things. The Italians are aware that they need to have the right Russian partner to do business in Russia. Judging by the events in Sakhalin, it seems they have picked the right one.

This website and sisters royaldutchshellgroup.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

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