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Forbes/AFX News: Russia Shows Sakhalin Partners Who The Boss Is: ‘Royal Dutch/Shell, Mitsui and Mitsubishi thoroughly humiliated by the Kremlin’

Chris Noon, 12.28.06, 3:58 PM ET 
It sounds as though Royal Dutch/Shell, Mitsui and Mitsubishi the three companies developing the Sakhalin-2 energy site in the eastern part of Russia, have been thoroughly humiliated by the Kremlin.

The companies will have to shoulder $3.6 billion in new costs to develop the Sakhalin-2 oil and gas project, the world’s largest energy development, thereby lowering the amount state-run Gazprom (other-otc: OGZPY – news – people ) will have to spend to join the project and speeding royalty payments to Russia. That’s $3.6 billion that the oil companies will never see again.

Sakhalin-2’s stage two budget may be approved at $19.4 billion, less than Royal Dutch/Shell (nyse: RDSA – news – people ) had originally sought, Deputy Energy Minister Andrei Dementiev told the Moscow-based Vedomosti newspaper Thursday. The amount includes the $3.6 billion the foreign shareholders will have to spend. Thus Gazprom will reap the rewards from the additional investment without participating in it. A bit like hosting a party and asking everybody to bring a bottle, but not providing any liquor yourself.

The companies have already completed the first stage of the project at a cost of about $2 billion and invested $12 billion in the second stage, scheduled for completion in 2014.

Last week, Gazprom wrested a majority stake from Shell and its partners for $7.45 billion in a deal that consolidates the Kremlin’s command of Russia’s energy resources. Shell saw its 55% stake trimmed to 27.5%, while Mitsui (other-otc: MITSF – news – people ) and Mitsubishi (other-otc: MSBHY – news – people ), had their interests halved, to 12.5% and 10%, respectively.

Sakhalin-2 was, once upon a time, typical of other massive energy projects being developed by foreign oil companies under production-sharing agreements signed during the 1990s, a time when oil prices were low and Russia was thirsty for foreign investment to develop its energy reserves. The idea was the oil companies would invest in the project but get their money back from the initial production; profits thereafter would be shared with the government.

The stakeholders in Sakhalin-2 announced last year the doubling of the cost of the project, which was initially set at $10 billion. This angered the Russian government, as it would delay the payment of its share of the profits. Moscow then threw all manner of roadblocks in the way of the foreign companies trying to develop Sakhalin. In September, it accused Shell of violating worker safety rules a week after pulling environmental authorization for the project.

AFX News contributed to this article.

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