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Chicago Tribune: Russia pursues policy to control its own energy resources

Saturday 13 January 2007

MOSCOW: Russian authorities have never been known for their eco-friendliness, but late last year inspectors swooped down on the vast Kovykta natural gas field in east Siberia and came away with a laundry list of alleged misdeeds, ranging from excavation violations to illegal logging.

Few in Russia, however, believe the government suddenly has gone green.

Kovykta is Russia’s largest natural gas field, storing enough natural gas to keep the world’s largest energy consumer, the U.S., supplied for two years.

And while its 1.9 trillion cubic meters of gas are being developed by joint venture involving British Petroleum, Kovykta is seen as the Kremlin’s next move in a methodical campaign to elbow foreign oil majors aside and commandeer the country’s energy sector.

A consortium led by Royal Dutch Shell once oversaw the world’s largest oil and natural gas development project, an energy venture called Sakhalin 2 in the Russian Far East. But after relentless pressure from Russian authorities that included a series of environmental inspections and a permit revocation, the Shell-led consortium buckled and sold a majority stake to Russia’s state-owned natural gas monopoly, Gazprom, for $7.45 billion.

The Dec. 21 sale was viewed as a milestone in the Kremlin’s quest for energy sector dominance and a sobering message to foreign oil companies that their role in Russia’s vast energy wealth will be second-tier.

Analysts say Kovykta, being developed by BP and its Russian partner, TNK, is next in line. Russian environmental inspectors have asked prosecutors to begin acting on their findings, and a Russian agency that governs subsoil natural resources licensing will decide early this year whether to revoke TNK-BP’s license on the grounds that it isn’t producing the levels of natural gas it initially promised.

“TNK-BP is in a situation where they just don’t have much of a choice,” says Nadezhda Kazakova an analyst with MDM Bank in Moscow. “With energy sector revenue now linked to the state, it’s hard to see how the state will let (Kovytka) go.”

Russia once desperately sought the involvement of foreign oil majors in its energy sector. After the Soviet breakup in 1991, Russia’s shaky economic outlook forced the Kremlin to bring in international oil giants like Shell to develop difficult-to-reach oil and natural gas deposits.

As an enticement, the Kremlin under Boris Yeltsin signed so-called production sharing agreements that set restrictions on how much of the profit would be set aside for state coffers.

Under Russian President Vladimir Putin, the Kremlin has adopted a radically different energy strategy that calls for state dominance over oil and natural gas, collectively the engine behind the Russian economy. Putin’s approach still allows foreign oil majors to bring their capital and technical know-how to Russia, but their holdings in Russian energy ventures should be limited to minority stakes.

Lately, the Kremlin has looked to its $240 billion energy giant, Gazprom, along with the government’s cadre of environmental inspectors, to execute that strategy.

Gazprom had been in talks with the Shell consortium for two years, angling for a stake in the lucrative Sakhalin 2 project. When finished, Sakhalin 2 will produce 150,000 barrels of oil each day and supply roughly 7.5 percent of the world’s demand for liquefied natural gas.

Gazprom and Shell initially agreed to a swap that would give the Russian natural gas giant 25 percent of Shell’s stake in Sakhalin 2 in exchange for a 50 percent stake in Gazprom’s Zapolyarnoye natural gas deposits in western Siberia. However, after the accord was reached, the consortium doubled the project’s price tag to $20 billion, a move that angered the Kremlin and put the deal on hold.

Afterward, environmental inspectors dispatched to Sakhalin Island, a 600-mile strip of land off Russia’s Pacific coast, recorded a host of violations that ultimately led to the revocation of the project’s environmental permit. With the project’s future uncertain, Shell and the consortium’s Japanese partners, Mitsui and Mitsubishi, agreed to hand over control of the project to Gazprom.

With Sakhalin 2 firmly in the Kremlin’s grip, authorities are now turning their attention toward Kovykta and TNK-BP, a joint venture between the British oil giant and a private Russian oil company. Rosprirodnadzor, Russia’s environmental watchdog agency, has accused TNK-BP of illegally piling mounds of fill onto the banks of the Lena River and unauthorized logging. The agency has asked Russian prosecutors to take up the case.

TNK-BP faces an even bigger problem from Rosnedra, Russia’s subsoil licensing agency. TNK-BP’s license requires the company to produce 9 billion cubic meters of natural gas from Kovykta by 2007. That mark is attainable, TNK-BP officials say, but should be amended since the local market for gas, the Irkutsk region, requires only 2 billion cubic meters.

To comply with the 9 billion cubic meter requirement, TNK-BP would have to burn off what the local market doesn’t consume.

Kovykta’s full potential could be realized if TNK-BP were allowed to export natural gas to energy-hungry China to the south. However, Gazprom, which under Russian law is the only entity permitted to export natural gas, has balked at the idea, saying gas exports from Kovykta shouldn’t begin until 2015.

Rosnedra officials have said they will decide early this year whether to revoke TNK-BP’s license.

“We are talking right now with both Gazprom and with Russian officials,” said TNK-BP spokeswoman Maria Drachova. “We never give up hope.”

Industry observers warn that Russia’s strategy could backfire. Russia’s energy sector still needs participation from Western majors to realize its full potential. State-owned giants like Gazprom continue to be hamstrung by stifling inefficiency and lack of infrastructure investment that impedes growth of Russia’s energy sector.

Reducing foreign energy majors to the role of minor player, says William Ramsey, deputy executive director of the International Energy Agency, is only going to further discourage those companies from doing business in Russia.

“Basically, (the Russians) are saying, `We want your money but not your mouth,’ ” Ramsey says. “I wouldn’t want to take that to my board of directors.”

(c) 2007, Chicago Tribune.

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