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Russia chides oil majors on production

Associated Press

Russia chides oil majors on production

By CATRINA STEWART 07.14.08, 2:10 PM ET

MOSCOW – Russia’s energy projects, all of which have foreign participation, failed to achieve their oil production targets in 2007, the state auditor said Monday.The projects in question wereExxonMobil (nyse: XOM – news – people)’s Sakhalin-I, Gazprom’s Sakhalin-II in the Far East and Total’s Kharyaga, Russia’s Audit Chamber said in a statement. All of them operate under production-sharing agreements, or PSAs.

Russia devised production-sharing agreements in the 1990s to lure foreign investment into some of its more difficult and inaccessible oil fields. Under PSAs, companies were able to recoup their investment costs before sharing profits with the Kremlin.

But such contracts fell out of favor after Vladimir Putin took over the presidency, a period marked by growing resource nationalism.

Declining oil production has emerged as a hot topic in Russia, after the world’s No. 2 oil exporter saw output fall in the first quarter for the first time in years.

While oil prices have soared to record highs, Russian oil companies have seen little of the windfall profits, struggling under the burden of high oil taxes, which they claim has hampered their ability to invest significantly in new exploration.

Parliament approved a raft of tax breaks for the oil sector last week, starting from next year, after intense lobbying from oil companies.

The Audit Chamber’s report went on to criticize the Russian government for its lax supervision of the PSAs, claiming they had failed to ensure the payment of fines for violations, including environmental damage.

“It’s quite likely that any report by a government agency … either has some political motivation or can be used for a political purpose,” said Chris Weafer, chief strategist at UralSib bank.

He speculated that the Audit Chamber’s report could be used either to justify Gazprom’s actions two years ago, when Shell was pressured into ceding control at Sakhalin-II, or to strengthen the government’s hand in a future push for control at Sakhalin-I.

Gazprom has also sought to prevent Exxon Neftegaz from exporting its gas abroad, a dispute which analysts say has affected oil output from the project.

Letters have been sent to Exxon Neftegaz, Sakhalin Energy Investment Company – where Shell is the No. 2 shareholder after Gazprom – and Total. The auditor has also forwarded details of its claims to the Finance Ministry and the Federal Anti-Monopoly Service.

Sakhalin Energy, Exxon Neftegaz and Total representatives could not be reached for comment Monday evening.


Copyright 2008 Associated Press. All rights reserved.

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