Tue 19 Sep 2006
Russia tries to rein in foreign oil firms
Posted by Dan Welch under Peakist , Environment , Russia , Gazprom· State withdraws approval for Shell’s Sakhalin project
· Gazprom rumoured to want half of BP venture
Terry Macalister and Michael Mainville in Moscow Tuesday September 19, 2006
The Guardian
Shell and BP were facing legal wrangles and upheaval in Russia last night, raising doubts about the involvement of foreign companies in the country’s oil and gas sector. Government approval for Shell’s $20bn Sakhalin project was withdrawn and state-owned Gazprom was reported to be trying to buy half of the TNK-BP joint venture.
Russia’s Natural Resources ministry said it had revoked the environmental approval for the major Sakhalin-2 scheme in the far east of Russia to “satisfy the arguments of the prosecutor’s office” leaving the future of the scheme in doubt.
The prosecutor general’s office alleged at the weekend that permission to develop the second phase of the Sakhalin island gas project had been granted illegally, but Shell insisted last night that it had done nothing wrong.
The growing pressure on Shell comes at a time when state-owned Gazprom has been trying to persuade the Anglo-Dutch oil company to sell it a 25% stake in Sakhalin-2 in return for some of its other Russian assets. The project has already proved difficult for Shell, with costs doubling, and mounting anger from environmentalists over potential damage to an endangered whale population.
Some interpret the permit issue as the latest attempt by Moscow to wrest back control of oil and gas assets held in the private sector while Gazprom acts as a political arm of the Kremlin. There have also been local reports that ExxonMobil’s Sakhalin-1 oil project could face a similar fate.
Shell said it was continuing to work on Sakhalin, but admitted the removal of its environment permit might lead to more delays and further cost overruns.
“Although there have been various environmental challenges on this project, these have been tackled and largely overcome … We are confident there are no valid grounds to revoke the order 600 [environment permit],” said the company.
Sakhalin-2 is one of two projects in the Russian far east run by western energy firms under production sharing agreements signed in the 1990s, when Russia lacked the resources to develop oil and gas projects on its own.
The other is the ExxonMobil project, which is 20% owned by state-controlled oil company Rosneft. With the Russian economy now booming thanks to high oil prices, many government officials have called for a revision of the Sakhalin-2 deal to include Russian participation.
“This is going to be interpreted by many as an attempt by Gazprom to enter the project,” said Adam Landes, an oil and gas analyst at Renaissance Capital. “It seems to be a brutal way of renegotiating previous deals that were quite humiliating for Russia.”
At the same time, Gazprom, which is the biggest gas group in the world, was said by Russian newspapers to be in talks to buy the holding in the TNK-BP joint venture that is currently controlled by three local Russian investors.
The partners in TNK, which has become a vital contributor to growing oil production at BP, are poised to receive the last of three $1.25bn instalments for selling part of the business to Britain’s biggest company.
The Alfa Group, Renova and Access Industries are locked in to the joint venture until the end of 2007 under the terms of the sale agreement, but are then free to sell out to whoever they wish.
The Vedomosti business newspaper quoted Gazprom senior managers as saying they had held preliminary negotiations with the Russian TNK-BP investors. They are “not against selling their shares to Gazprom,” one manager was quoted as saying. “It would be a good deal to develop our company’s oil business,”added the unnamed source.
BP said it was aware of the reports, but did not want to comment. Gazprom would also not comment on the BP issue, but told the Guardian that it had nothing to do with environmental permits being withdrawn from Shell at Sakhalin. “We have heard this [about the permits] but our talks with Shell [on the asset sale] are going well,” said a Gazprom spokesman.
Russia has taken repeated steps in recent years to consolidate state control over the energy sector, including the dismantling of Yukos, once Russia’s largest oil company, and the imprisonment of its founder, Mikhail Khodorkovsky, on charges of tax evasion and fraud.
Backstory
Sakhalin-2 is the second stage of a huge oil and gas project in the far east of Russia. The island was formerly a penal colony for the tsars and was mentioned in the works of Chekhov. Along with Sakhalin-1, operated by ExxonMobil, the oil and gas schemes are the biggest direct foreign investments in Russia. Shell claims the Russian state stands to earn $50bn (£26bn) in tax and other benefits over 40 years. Already living standards in the Sakhalin region have risen by 500% since 2002 and driven unemployment down to a national record low of 1%, according to Shell.
Sakhalin Environment Watch
http://www.sakhalin.environment.ru/en/index.php
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September 24th, 2006 at 6:26 am
Blair wades in to Russia oil crisis
Gazprom moves to seize further control of energy resources as crisis threatens diplomatic relations
Oliver Morgan and Nick Mathiason
Sunday September 24, 2006
The Observer
Tony Blair has made clear to Russian President Vladimir Putin his deep concern over threats to strip Shell of its licence to operate the $20bn Sakhalin-2 oil and gas project off the east coast of Russia.
It has also emerged that Gazprom, the giant Russian state-controlled energy group, is in negotiations to buy into the neighbouring Sakhalin-1 project, led by Exxon of the US. Russian authorities have warned that Exxon, too, may face revocation of its licence on this project, due to cost increases. The development could spark a serious deterioration in relations between Washington and the Kremlin.
Last week Russia’s Ministry of Natural Resources suspended environmental permits allowing Shell and its partners - Mitsui and Mitsubishi of Japan - to operate the project, which is 80 per cent complete, and which has already secured contracts for a large proportion of the gas it is expected to produce. Sakhalin-2 has reserves totalling 4.5 billion barrels.
Downing Street, along with the Foreign Office and the Department of Trade and Industry, have made it clear they are not satisfied with the Russian government’s explanation for the suspension.
Foreign Office officials believe that if there are environmental concerns - which have been raised - they should be subject to negotiation rather than ‘unilateral action of this kind’. Russian officials have insisted that the suspension comes because of threats to the habitat of the rare Western Pacific grey whale and to salmon breeding grounds.
The Russian government and Gazprom executives have also indicated that they are unhappy with cost increases from $10bn to $20bn on Sakhalin-2. Gazprom signed a deal to swap assets with the consortium in return for a stake last year, before the cost increases were announced.
Observers believe last week’s moves are an attempt by the Kremlin to improve terms for Gazprom taking a slice of their project. Gazprom wants a stake of more than 25 per cent in Sakhalin-2; this would see Shell lose its majority holding in the project. In return, Shell would get a share of an Arctic gas and oil field.
The UK government, however, insists that these issues should be settled within the terms of the Production Sharing Agreement signed between Shell and its partners and the Russian government.
An official said that at the Moscow G8 summit Blair and Putin had stated publicly that transparency and co-operation were essential between Russia and the West as Russian resources would remain of international importance over coming decades. The official added: ‘If the Russian government were to renege on this, it would cast doubt on the investment climate in Russia.’
Blair’s concerns are echoed by the US government. The State Department has expressed concerns to the Kremlin over Shell, and has made inquiries about a statement from NRM that Exxon could face similar measures over cost increases on the neighbouring Sakhalin-1 project.
The State Department said: ‘The US government is very concerned by recent action threatening revocation of Shell’s environmental permit for Sakhalin.’
Meanwhile, it is believed that Gazprom is in negotiations with the Indian National Oil and Natural Gas Corporation (ONGC) about buying out its 20 per cent stake in Sakhalin-1. It would also give Gazprom significant stakes in the two most advanced projects on Sakhalin island.
September 24th, 2006 at 6:28 am
Investors fear economic cold war as Kremlin eyes western assets
· Russian state gas group halts talks on Sakhalin-2
· EU and Japan warn of wider repercussions
Terry Macalister
Wednesday September 20, 2006
The Guardian
Gazprom, the Russian gas group, turned up the heat on Shell and intensified a growing international row yesterday by stopping talks over buying a stake in the troubled $20bn (£11bn) Sakhalin project.
The move comes a day after the Russian authorities withdrew Shell’s operating permit, sending shock waves through foreign investors. The European commission said it took “very seriously” Russia’s decision to revoke Shell’s environmental approval for Sakhalin-2, the world’s biggest liquefied natural gas project.
Energy is the key issue between the EU and Russia, which supplies a quarter of the EU’s oil and gas.
Diplomatic relations with Japan could also be damaged. Two of Japan’s largest companies, Mitsui and Mitsubishi, have a combined 45% stake in Sakhalin-2 and the prime minister in waiting, Shinzo Abe, said yesterday that he was concerned that “major delays might have a negative influence on Japan-Russia relations”.
Gazprom has been trying to muscle in on Shell by offering to exchange 50% of its Siberian Zapolyarnoye field for 25% of Sakhalin-2. It is not just Shell and Sakhalin-2 that is under pressure. The Russian natural resources ministry said ExxonMobil’s Sakhalin-1 project and Total of France’s Kharyaga oilfield in northern Russia may have their permits withdrawn for violating “technical” requirements, according to the Interfax news agency.
The moves reflect rumbling discontent around the Kremlin, where confidence is riding high on the back of high oil prices. Russia’s president, Vladimir Putin, knows he is sitting on huge oil and gas reserves in a world increasingly short of energy.
In recent years he has wrestled back into state control much of Russia’s reserves, which were sold off cheaply in the flawed privatisation process that created the oligarchs of the Yeltsin presidency. He has already targeted some of the super-rich oligarchs who benefited from the sell-offs. Now the deals with foreign companies, signed in the mid-1990s when oil prices were low, appear to be under attack.
This follows the major diplomatic row last winter when the state-owned Gazprom halted gas supplies to Ukraine, horrifying the European Union and bringing rebukes from the US government.
An asset grab by the Kremlin this winter in the frozen climes of Sakhalin would convince many that Russia is hell-bent on creating a new economic cold war.
Moscow fiercely denies the accusation and the minister of natural resources, German Gref, said yesterday: “As far as the existing agreements are concerned, we shall be obliged to ensure their observance.”
However, Sergei Kupriyanov, a Gazprom spokesman, said yesterday: “As far as our asset swap talks are concerned, they haven’t progressed for more than a year after Sakhalin-2 declared changes to the initial economic parameters of the project, which have yet to be approved by the Russian Federation. In this situation, we cannot continue talks.”
Yet on Monday another Gazprom spokesman insisted that talks were going well. The different stance was seen as Gazprom pressing Shell to make concessions.
The Anglo-Dutch group would not comment. Shell was reluctant to get into talks over disposing of its holding but soon realised that total opposition could put it into conflict with the Kremlin.
The way the Sakhalin project has been developing has already angered Moscow, which hopes to reap major tax rewards. But Shell has been forced to declare cost overruns - from $10bn to $20bn - as it struggled with cost inflation and the re-routing of pipelines to meet the demands of environmentalists, especially over protecting endangered Pacific grey whales.
Under the production sharing agreement (PSA), Shell only pays the maximum tax once it covers its costs. The cost inflation is hitting the state as hard as Shell.
A dispute with Gazprom and the Kremlin is serious for Shell, which is still trying to rebuild its reserve base and reputation since the chaos of 2004. Shell overstated its reserves then by 25%, leading to a big fine from New York and London regulators. The chief executive and exploration boss lost their jobs as legal writs flew.
Sakhalin is the first of a series of so-called legacy projects designed to reintroduce growth to Shell’s production profile, which has fallen in the last four years. These schemes, which also include the Athabasca oil sands in Canada, the Pearl gas-to-liquids in Qatar, and Gorgon liquefied natural gas in Australia, are high profile and costly but have quite low returns.
One analyst said: “Gazprom seems to be turning the screw on Shell … The environmental problems are very tiny really but if it lost its PSA for Sakhalin it would be disastrous.” Shell’s share price fell 1% yesterday to £17.37.
Bruce Evers, an Investec Securities analyst, said: “The latest difficulties do smack of politics. These contracts [PSAs] were considered sacrosanct but Russia just seems able to rip them up.”
No company is immune from state intervention. Russia’s biggest private oil firm, Yukos, was crushed by huge tax bills and its founder jailed for fraud. Its assets passed to the largely state-owned Rosneft.
One reason why Gazprom is keen on Sakhalin is because it has a monopoly on gas exports - the LNG would be the first gas to leave Russia under foreign control.
September 27th, 2006 at 2:54 pm
http://www.bankwatch.org/ says:
Material evidence of Sakhalin II environmental violations
September 19, 2006
“Responding to this week’s decision by the Russian Ministry for Natural Resources to revoke environmental approvals for the USD 20 billion Sakhalin II project, Sakhalin Energy is claiming that the issues raised are “not material”. Yet a stack of material has been out there for many months documenting the company’s violations of the approved project documentation and the requirements of Russian environmental protection legislation as it attempts to navigate its pipelines across Sakhalin’s many salmon-rich rivers and tributaries.”
“Following the Russian Ministry for Natural Resource’s recent environmental enforcement action against Shell’s Sakhalin II project, Russian and international environmental groups today sent a letter to the president of the European Bank for Reconstruction and Development (EBRD) to insist that Shell cannot credibly demonstrate that Sakhalin II complies with the bank’s policies.
The Ministry has shut down sections of the pipeline construction while it conducts an ongoing investigation into “multiple violations of environmental protection legislation.”
All very well, but its got to be pretty unlikely that if the project is bacjk in 100% Russian state hands its going to have a better environmental impact than western oil companies with all the the usual CSR pressures they face - but then maybe I’m being prejudice…I just cant help thinking that activist groups at shells AGM are going to care more about the grey whales than a former head of the KGB…
Environmentalists back Putin over Shell’s energy permit
· Downing Street and US express concerns
· Report lists mounting problems of gas project
Terry Macalister
Monday September 25, 2006
The Guardian
Russian President Vladimir Putin
The Russian president, Vladimir Putin. Photograph: AP
Britain has raised concerns with Vladimir Putin, Russia’s president, over last week’s withdrawal of Shell’s permit to develop the $20bn (£10bn) Sakhalin-2 energy project, suggesting the move could spark a diplomatic row.
Approval by the Russian natural resources ministry for Shell’s liquefied natural gas project on Sakhalin island, in the far east of the country, was abruptly withdrawn last Monday on environmental grounds. A Downing Street spokesperson said yesterday: “The government is raising its concerns about the decision with the Russian government. Downing Street is following this very closely.”
The US state department is also concerned. The move, to halt work on the world’s largest LNG project, was widely interpreted as an attempt by Russia to wrest back control of its natural resources from western oil companies. It sparked harsh words from the European commission and Japan.
The authorities also targeted the US oil group ExxonMobil, which runs Sakhalin-1 on the island, late last week, saying they would not allow it to expand the project. Campaigners from the Bankwatch group, a network of environmental groups in 11 countries, say Russia was right to stop environmental and other abuses at Sakhalin which had been going on for far too long.
Fears have been expressed for the Pacific grey whale which swims in the waters around Sakhalin. Bankwatch also argues that Shell should receive no funding from the European Bank for Reconstruction and Development, on the grounds that it is breaking bank rules by presiding over rising levels of crime and HIV.
Greig Aitken, of Bankwatch, said: “Russian and international environmental organisations have, for several years, documented the same pattern of violations cited by the Russian government, as well as a range of others that all have a grim bearing on an island that depends on fishing for one third of its economy.
“If there is talk of Russia asset-grabbing as it carries out its right to, belatedly, defend its environment, it should not overshadow the asset-grabbing Shell is attempting in the form of billions of dollars of international taxpayers’ money for a project it has been unable to get right for the last three years.”
A report issued by Bankwatch today talks of mounting problems on Sakhalin. It says the arrival of 5,000, mainly male, construction workers has led to increased poverty for local communities, particularly women. “The gender-specific negative impacts, presented in the report, range from anxiety about the safety of children due to increased heavy traffic, to rising crime levels, sexual harassment and violence against women. Furthermore, it reveals trafficking of women and increased prostitution and HIV/Aids,” says Bankwatch.
The EBRD says in a newsletter: “The first priority in addressing social issues is that our projects do not adversely affect anyone, especially vulnerable groups.”
Bankwatch believes Russia has been wrongly characterised in the reports of the standoff with Shell. It notes that the government demanded that one of its own oil companies, Transneft, reroute a vital pipeline to avoid environmental degradation near Lake Baikal at a $1bn cost.
State-owned Gazprom is pushing Shell to sell it a 25% stake in Sakhalin-2 in return for some Siberian assets. The threat that Sakhalin-2 might be halted as a result of the permit being withdrawn was seen as a way of putting more pressure on Shell to sell. Shell would not comment.
September 29th, 2006 at 8:06 am
Saga continues…
Russia gives out mixed messages to Shell and BP
Terry Macalister and Tom Parfitt
Tuesday September 26, 2006
The Guardian
Western oil companies were in confusion about the investment climate in Russia last night after the government appeared to soften its position with Shell but opened a new line of attack against BP.
Yuri Trutnev, natural resources minister, said there would be a full inquiry into environmental problems at Shell’s $20bn Sakhalin-2 scheme but insisted the operating permit was safe - for now.
“There is no question of removing the licence because of the result of the investigations. The inspection should only examine whether the operator is abiding by the environmental protection legislation,” said Mr Trutnev.
Ministry officials told the Guardian there was no immediate threat of stopping the project but the review could still lead to such a conclusion and involve millions of pounds’ worth of environmental improvements being demanded of Shell.
But in a separate development, the prosecutor general’s office summoned Valery Pak, the boss of Rusia Petroleum, TNK-BP’s operating company at the giant Kovytka gas field in Siberia, and expressed grave concern about its environmental impact.
“Pak was warned that if the breaches of legislation are not remedied in a stated time, the prosecutor’s office will apply to the federal subsoil-use agency for a cessation of Rusia Petroleum’s right to exploit the Kovytka deposit,” it said.
TNK-BP insisted that it had all the necessary permits and had satisfactory environmental reviews. “I’m not sure what to make of this,” said Bob Dudley, TNK-BP’s chief executive.
The two cases, which involve large, strategic oil and gas projects, mirror each other because Russia’s state-owned Gazprom has been trying to encourage the western companies to give it a stake.
The row over Sakhalin has been seen by many analysts within Russia, as well as observers outside, as an attempt by the Russian state to take further control over energy projects on its soil.
The natural resources ministry had earlier warned Shell that its environmental permit would be removed at the same time as state-owned Gazprom was manoeuvring to buy a 25% stake in Sakhalin-2. The ministry insists these two issues are not related and argues it had long-held reservations about the impact of the Shell project on the local environment.
Britain, the European Union and Japan have expressed concern about what is happening. The Kremlin has been warned before by the west about using energy as a political weapon.
Some of these concerns have been shared by international “green” groups such as Friends of the Earth and have been used to put pressure on the European Bank for Reconstruction and Development not to fund the project. Yesterday the campaign group Bankwatch issued a report on Sakhalin, claiming the scheme had brought an upsurge in violence and other social problems.
October 18th, 2006 at 2:27 pm
Shell’s environmental efforts fail to quell Russian threat
The Russian government tightened the pressure on Shell over the Sakhalin-2 gas project by warning that failure to sort out environmental problems would lead to “absolutely any sanctions”, reports Terry Macalister in The Guardian (Tuesday October 17, 2006)
The tough stance from the resources minister, Yuri Trutnev, came even though Shell’s chief executive, Jeroen van der Veer, said his company had already sorted out the bulk of the problems.
The Sakhalin-2 scheme, the world’s biggest liquefied natural gas project, has been dogged by ecological difficulties and soaring financial costs.
Mr Trutnev said Shell had nothing to fear for the future of the £11bn scheme if it produced an “exhaustive” plan to deal with the damage inflicted on the local area. But he warned: “If such measures are not proposed then absolutely any sanctions are possible from our side.”
Industry experts have long questioned whether the Russian government is trying to force Shell off the Sakhalin scheme. The Kremlin is angry about the doubling of costs which will delay its tax revenues under the production-sharing agreement Shell tied up a decade ago.
Mr van der Veer told the foreign investment advisory council chaired by the prime minister, Mikhail Fradkov, that Shell had answered Russia’s environmental concerns.
“Although the project has faced significant environmental challenges, we firmly believe these have been fully and transparently addressed,” he said. “We are confident that all remaining issues can be resolved through our ongoing, constructive and fair dialogue with the Russian government.”