December, 2006:

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. read more

December 29, 2006
Carl Mortished, International Business Editor
 
Royal Dutch Shell and its Japanese partners in the Sakhalin-2 gas project will be forced to swallow a third of the $10 billion (£5.1 billion) cost overrun suffered by the giant liquefied natural gas facility in eastern Siberia, according to reports from Moscow.

A confidential agreement between the Russian Government, Shell, Mitsui and Mitsubishi has settled the dispute over the project’s expanding budget on terms that require Shell and its Japanese partners to absorb $3.6 billion of the cost overrun. The partners had expected to be able to recoup the costs from first sales of gas. 
 
According to Moscow press reports, the new agreement sets the project’s total cost at $19.4 billion but stipulates that only $15.8 billion of the costs can be fully redeemed under the Sakhalin-2 production- sharing agreement (PSA), meaning that the remaining $3.6 billion must be borne by the original Sakhalin-2 partners. read more

Crude-oil futures broke a four-day losing streak, settling at $60.53 a barrel on the New York Mercantile Exchange, after data showed a bigger-than-expected drawdown in crude supplies in the latest week.

Here is Thursday’s roundup of oil and energy news:

* * *
RUSSIA, BELARUS HEAD FOR SHOWDOWN: Russia and the former Soviet state of Belarus are heading toward a showdown over natural-gas prices that both sides warn could lead to a New Year’s Day pipeline shutoff similar to the one a year ago, when thermometers plunged in Ukraine and Europe. Gazprom’s willingness to threaten yet another midwinter fuel cutoff is reinforcing fears across Western Europe about its reliance on Russia for the energy that powers the region. read more

Threats Widen in Gazprom-Belarus Dispute

Gazprom’s dispute with the Belarusian government over the cost of gas — this year’s edition of what seems like an annual winter pricing fight between the state-owned Russian monopoly and a formerly Soviet client state — now threatens the supply to Western Europe. Gazprom said yesterday that Germany, Poland and Lithuania could face supply disruptions, because if Gazprom cuts off Belarus, Belarus will halt all natural-gas flows through its pipeline, which provides 20% of Europe’s gas. “If I don’t have a domestic gas supply contract, Gazprom won’t have a transit deal,” Belarusian Deputy Prime Minister Vladimir Semashko said, as quoted by the Financial Times. Gazprom has said it will turn off the taps for Belarus starting Jan. 1 if no deal is signed. read more

COMMENT FROM breakingviews 
December 28, 2006

The last thing BP needs is another big problem. The oil giant is already dealing with a fight over management succession and faces U.S. lawsuits on safety lapses and trading practices in the futures markets. But Russian resource nationalism could well join the list, if reports of a government investigation into TNK-BP’s Kovytka gas field prove correct.

This could be no more than a little local difficulty. TNK-BP, 50% owned by BP, can only exploit Kovytka fully if Gazprom lays export pipelines out of Eastern Siberia. Gazprom, though, wants a big share of the revenue. And the new investigation into a technical contract violation — where TNK-BP produced less gas than agreed, but only because there were no buyers for any more — sounds like a means of getting its way. read more

By Andrew E. Kramer
Thursday, December 28, 2006

MOSCOW

The Russian government has won a further concession from the foreign partners at the world’s largest combined oil and natural gas field, known as Sakhalin-2, which is being developed in Russia’s remote Far East.

Last week, Gazprom, the Russian energy monopoly, took majority control of the project when the 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 from a Russian environmental regulator. Critics called the sale a forced nationalization. read more

By John Donovan

News of a “secret protocol” between Shell and the Russian government has leaked out today. The Russians evidently wanted to further embarrass Shell management. Note that there is no mention of Mitsui and Mitsubishi involvement in the secret deal.  Shell refuses to comment on the “confidential” secret agreement.

This comes just days after Shell CEO, Jeroen van der Veer, was quoted gratefully thanking President Putin during the Gazprom/Sakhalin Energy deal signing ceremony in Moscow (“Thank you very much for your support,”).  read more

U.S. scholar Marshall Goldman says energy wealth and control over export pipelines have made Russia more powerful than at any time in its history.

Professor Goldman told the Jamestown Foundation that Russia’s post-cold war power is built on its oil and gas resources. He said both eastern and western Europe have become dependent on Russia for oil and gas and that alternative supplies are not available. The recent boom in oil and gas prices, said Professor Goldman, has greatly boosted Russia’s economic and political clout. read more

Created: 28.12.2006 12:45 MSK (GMT +3), Updated: 13:29 MSK

Royal Dutch/Shell signed a secret protocol with the Russian government as part of its deal to sell half of the Sakhalin-2 project to Gazprom, allowing Shell to boost spending but not as much as it wanted, Russian business daily Vedomosti reported on Thursday, Dec. 28.

Shell is now allowed to boost spending in the giant Sakhalin project to $15.8 billion from the previously approved $12 billion, the daily said.

Shell’s spokesman in Moscow Maxim Shub told Reuters the protocol was confidential and he would not comment on it. He said details of project costs would be discussed in February at a meeting with the Russian government. read more

By Torrey Clark

Dec. 28 (Bloomberg) — Royal Dutch Shell Plc and its Japanese partners will take on $3.6 billion of costs themselves to develop the Sakhalin-2 oil and gas project in Russia, lowering the amount state-run OAO Gazprom will spend to join the project and the hastening the state’s share in the profit.

Sakhalin-2’s stage-two budget may be approved at $19.4 billion, less than Shell had sought. The amount includes $3.6 billion the foreign shareholders will spend without getting tax relief, Deputy Energy Minister Andrei Dementiev told Moscow-based Vedomosti newspaper in remarks confirmed by the ministry’s press office today. read more

Last Update: 7:21 AM ET Dec 28, 2006

By Aude Lagorce, MarketWatch

LONDON (MarketWatch) — The European Commission on Thursday called for Russia and Belarus to find a rapid solution to a dispute over natural-gas prices that threatens damage to relationships between the two long-term allies and to disrupt deliveries to the continent. 

“The Commission is following the situation very closely since it may affect gas supplies to the European Union. I call the two parts to reach as soon as possible a satisfactory agreement that do not put in question gas transits to the E.U.,” said Commissioner Andris Piebalgs in a statement.  read more