By PHIL IZZO
December 12, 2006
Once again the cost of doing business in Russia has become apparent. 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 is expected to 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.
Despite the apparent blow to Shell, analysts and industry executives were expecting Gazprom to wind up with a big stake one way or another. While the viability of the project was never in serious doubt, Shell executives worried about any delays to construction and to production that could have affected the economics of the project.
At least Russia didn’t tear up a production-sharing agreement altogether, as some feared. Instead, Russia 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 following the cost overruns. Moscow put pressure on Shell by withdrawing its own 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 still is too great.
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