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The New York Times: Gas Investors Bow to Pressure on Recovering Expenses

New York Times Sakhalin II

(Photo: Joseph Sywenkyj for The New York Times: The Sakhalin 2 project in Russia’s Far East is still under construction. Last week Gazprom took control of the project when foreign developers, led by Royal Dutch Shell, agreed to sell it 50 percent plus one share.)

MOSCOW: The Russian government has won another concession from the foreign partners of the oil and natural-gas field being developed in Russia’s remote Far East, known as Sakhalin 2.

Last week Gazprom, the Russian energy monopoly, took control of the project when foreign developers led by Royal Dutch Shell agreed to sell 50 percent plus one share to Gazprom, after months of pressure on the company and accusations about environmental issues from a Russian regulator. Critics called the sale a forced nationalization.

The latest twist came Thursday when the Russian government said the private developers had given up their right to recoup $3.6 billion in capital expenses on a priority basis. They were supposed to collect the money before the government began collecting sizable royalties.

The slower repayment to the developers further devalues their investment, though by how much is unclear. And it benefits the government, which through Gazprom has been tightening its grip on the oil and gas industry in Russia, while also growing more assertive with the countries where it supplies energy.

In the sale announced last week, Shell cut its stake in Sakhalin 2 in half, to 27.5 percent, and the two Japanese trading houses partnered with it — Mitsui and Mitsubishi — cut their holdings by that degree. Mitsui’s holding fell to 12.5 percent, and Mitsubishi’s went to 10 percent. Gazprom agreed to pay $7.45 billion, a price that analysts said was below market.

Russia is compelling other foreign oil investors to renegotiate deals made in the 1990s, often under regulatory threat.

On Thursday, for example, Viktor Vekselberg, who owns part of the British-Russian joint venture TNK-BP, met with Gazprom’s chief executive, Aleksei B. Miller. Russian regulators have threatened to revoke the TNK-BP license to a large Siberian gas field, Kovytka, at the same time Gazprom is negotiating for a stake in the project.

The agreement to delay compensation for capital expenses at Sakhalin was not announced in the accord last week but was included in a confidential protocol signed by the foreign partners and the Russian government. A deputy Russian ministry of energy and industry, Andrei Dementiev, disclosed the protocol in an article Thursday in the business daily Vedomosti. A ministry spokeswoman confirmed that account.

According to the original contract with Shell, signed in 1994, the government would receive low royalties until the foreign partners recovered their capital costs. Afterward, over time, the government’s share was to rise.

The change made public Thursday means that the companies will not recoup their costs upfront. That gives the government a bigger take without formally renegotiating the production sharing agreement. To change that governing document would take an act of Parliament.

The government said it would approve a budget of $19.4 billion for the next state of development, stipulating that the partner companies will not begin to recover $3.6 billion of this before the government begins collecting meaningful royalties, Vedomosti reported. The government evidently was concerned that under the former terms, high development costs would prevent it from earning bigger and faster royalties.

A Shell spokesman, Maksim Shoob, declined to comment on Thursday, citing a confidentiality agreement with the Russian government.

“The protocol between Sakhalin shareholders and the ministry of energy and industry is confidential, and we will never breach any confidentiality agreement,” Mr. Shoob said.

The project, north of Japan, includes offshore platforms, 500 miles of oil and natural-gas pipelines, a liquefied natural-gas plant and an oil terminal. It is supposed to begin production in 2008.

The three commercial partners have sunk about $12 billion into Sakhalin 2. The terms announced last week meant that they would recoup only about half their capital investment so far, and in addition would be compensated little for the four billion barrels of reserves estimated to be recoverable at the site.

But last week in Moscow, at the ceremony where President Vladimir V. Putin announced the new terms, Shell made the best of the situation.

Its chief executive, Jeroen van der Veer, said the company needed to operate in a stable environment after the regulator caused months of turmoil with claims of illegal logging and damage to salmon streams, threatening to halt the project.

“Now there is stability,” Mr. van der Veer said, “so we can all work together, all the shareholders, to get the project up and running as soon as possible.”

Published: December 29, 2006

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