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Reuters: INTERVIEW-Russian watchdog warns of bogus oil reserves

Wed Sep 5, 2007 10:25PM BST
By Matt Daily and Richard Valdmanis

NEW YORK, Sept 5 (Reuters) – Several foreign oil and mining companies operating in Russia have been overstating reserves by as much as 800 percent, the deputy head of Russia’s environment watchdog said on Wednesday.

“This is a new kind of business that has unfortunately appeared to have started in Russia,” Oleg Mitvol told Reuters in an interview. “There is no Russian legislation that has been broken. All we are saying is ‘be careful’.”

Mitvol, who led a high-profile attack on the $22 billion Royal Dutch Shell-led (RDSa.L: Quote, Profile, Research) Sakhalin-2 energy project last year, said Russia was getting a bad reputation for cracking down on what he called irresponsible behaviour by foreign firms.

Among his targets are British Imperial Oil (IEC.L: Quote, Profile, Research), which he said overstated its oil reserves by 800 percent, and Highland Gold Mining Ltd. (HGM.L: Quote, Profile, Research), which failed to produce gold from its Mayskoye deposit in 2006 as its license required.

Mitvol was visiting analysts with several banks in the United States who hold investments in companies operating in Russia, warning them about the dubious reserve accounting methods.

Oil companies have turned to using suspect, unverifiable seismic measurements to convince investors they hold valuable oil deposits, Mitvol said.

“A lot of these companies exist only virtually, so to speak, on their (Internet) space,” Mitvol said. “It is sad but it is true that Russia often times has to explain and apologize. That is just a historical legacy of ours.”


Mitvol said he was hoping to counter a “smear campaign” against Russia that he said began with the enforcement of environmental laws against Royal Dutch Shell.

Royal Dutch Shell ceded control Sakhalin-2 — the world’s largest liquefied natural gas project — in April after Russia’s environment watchdog charged it with ecological violations, including deforestation and pipeline leaks.

Oil and commodities analysts have accused Russia of using licensing quibbles to wrest control of its natural resources away from foreign companies.

“At the same time as Sakhahlin-2 was happening, BP (BP.L: Quote, Profile, Research) was having a similar issues in Alaska,” Mitvol said. “For some reason, nobody ever tried to say that the United States was trying to squeeze the Brits out of Alaska.”

Other companies are also facing scrutiny, and critics say the trend has made Russia less attractive to investors.

However, Mitvol said Russia still offered opportunities for companies, including in environmental technologies and the processing of petroleum gas into liquids.

Currently, some 60 billion cubic meters of gas are burned off as waste by Russian companies that lack the capability to turn it into fuel, he said.

Such investments would also give companies access to the vast amounts of carbon credits that Russia will be awarded under the Kyoto Protocol.

Russian industrial production declined sharply in the economic downturn after the breakup of the Soviet Union, cutting its emissions of the greenhouse gasses blamed for global warming dramatically.

Under the Kyoto treaty, Russia can sell its extra emission credits to other states that will not on their own meet their emission reduction targets.

(Reporting by Matt Daily and Richard Valdmanis)

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