The Orange County Register: Russia pushes Shell out of its majority ownership of a promising oil-and-gas field

December 14,2006
The Freedom View

The Russian government has successfully pressured Shell, the Anglo-Dutch oil company, into reducing its stake in a promising but difficult oil and natural-gas field in Siberia from a majority share to a minority share. Gazprom, the Russian state-owned energy group, which has invested little or nothing in exploiting the energy resources on and around Sakhalin Island, will now have the majority interest. The interests of two minority Japanese investors, Mitsui and Mitsubishi, have also been reduced.

This might be a story for the back of the business pages except that it seems to be part of a pattern of pushing foreign companies out of any ownership interest in Russian energy resources, as part of a larger project of bolstering the power of the Russian state and making it more authoritarian. Russia’s government wants to control those energy resources, and its temporary cut-off of oil supplies to Belarus last year — which had an impact on Western Europe — shows that it is not averse to using the power such control will give it in geopolitical power games.

There is not much we can do about this, but it’s a troubling development.

Sakhalin, an island off the coast of Siberia north of Japan and once claimed by Japan, has sizable oil and gas reserves. When it is fully exploited it is expected to produce 150,000 barrels of oil a day and around 10 million tons of liquefied natural gas a year. But it is a difficult environment in which to operate — bitingly cold, with 1,000 streams and rivers used by salmon for spawning, and near a feeding ground for gray whales. Development to date has cost about $20 billion, $10 billion more than originally expected.

Shell went into the project as a 55 percent owner of the energy to be extracted and the major operational partner. This summer the Russian environmental ministry shut down the project for environmental problems. Those problems may well be real, but the Russian government tends to come down hard on foreign companies, like Shell and Exxon-Mobil, while Russian-owned companies are seldom sanctioned.

The sanctions against Shell created pressure to give in to Russian demands that it cede its majority interest, giving Gazprom a 51 percent stake and Shell 25 percent. There’s little doubt that the sanctions were deployed politically. Presidential Press Secretary Dimitry Peskov told reporters that in the future foreign companies might be welcome as subcontractors, providing capital and expertise, but not as owners.

These moves against foreign ownership of natural resources in Russia reflects a changing economic environment. In the 1990s Russia was strapped economically and welcomed foreign investors and owners. Since then oil prices have risen, and Russian energy companies have profited, so they need foreign investment less.

This has coincided with an increase in nationalist sentiment in Russia, encouraged and exploited by the government to justify a more authoritarian regime than most people hoped for after communism fell. Russia clearly aches to be a major geopolitical power again, and oil wealth – and the leverage of being a major energy supplier for Western Europe – is part of the equation.

Such dreams of empire are usually vain in the end, and in the execution deleterious to the ordinary people of countries that harbor them. Free and open markets produce wealth faster and distribute it more equitably than state-controlled economies.

Vain as such dreams may be, however, imperial ambitions usually lead to political and military conflicts that can cause enormous suffering. Russia under Vladimir Putin is hardly an imminent threat to the United States. But its ambitions bear watching.

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.