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The Observer: Red alert as Russia floats its oil giant

'I don't see the likes of Exxon or Shell taking part in a Rosneft auction. I think the state having a dominant stake might put them off.': Sunday January 8, 2006
With Putin flexing his muscle in the energy market, investors should think twice before taking a stake in state-controlled Rosneft, writes Conal Walsh
Sergei Bogdanchikov, president of Rosneft, laughed when The Observer asked whether his Kremlin-controlled company was an example of 'state capitalism'. 'I'm not a politician,' he replied. 'I don't really care what kind of capitalism it is.'
That was 15 months ago, and as Rosneft prepares for a London and Moscow flotation, Western investors don't seem to care either. Russia's biggest oil firm plans to make around a fifth of its stock available at IPO, and to raise up to $20bn (£11.4bn). It will probably succeed – even though the Russian government will retain a majority shareholding.
It may seem ironic that the London market is being asked to finance one Kremlin-run company just as another – gas giant Gazprom – has been engaged in an alarming dispute over energy supplies to neighbouring Ukraine that threatened to disrupt Western Europe's own supplies. But high oil and gas prices have created huge investor appetite for Russian energy stocks.
The Russian government is keen to capitalise on this demand. As well as planning the Rosneft float, the president, Vladimir Putin, allowed Gazprom to make 49 per cent of its stock available to foreign investors. Russia is set to become the principal provider of energy to Western Europe, and Putin is busy giving his corporate monoliths a friendlier face, hiring Gerhard Schroder, Germany's former chancellor, to chair Gazprom's $5bn Baltic Sea pipeline project, and trying (though failing) to recruit US politician Donald Evans to Rosneft.
But Gazprom and Rosneft will both remain under state control, which raises questions about how productive either is going to be, and how well run.
'There is plenty of fat to be cut, especially at Gazprom,' says Stephen O'Sullivan, an analyst at Moscow-based United Financial Group. 'But painful cost- cutting and efficiencies aren't greatest priorities when gas prices are so high.'
Minority shareholders will also be powerless to prevent Putin using the companies for political and diplomatic ends, as he appears to have done in the recent Ukraine dispute. Some, including Merrill Lynch, saw Russia's dramatic decision to withdraw the heavily subsidised gas supplies Ukraine has hitherto enjoyed as sound commercial logic, and the inevitable consequence of Ukraine's growing political independence from Moscow. But the episode has cast doubt on Russia's reliability as an energy supplier, not least because it led to temporary supply cuts to several countries further west. Both the EU and America accused Russia of heavy-handedness. In Britain, the incident will boost calls for nuclear power and a lessening of our dependence on foreign imports.
Analysts agree that the Kremlin is determined to extract full political capital from Russia's emerging dominance in world energy markets. To that end, it has used fair means and foul to bring more of the country's oil and gas assets under state control. It spent $7.5bn last year bringing its shareholding in Gazprom up to 51 per cent – money that subsequently helped the gas giant buy Sibneft from Roman Abramovich. It barred foreign companies from owning energy assets deemed 'strategic'. Most controversially, it jailed oil oligarch Mikhail Khodorkovsky for fraud and effectively renationalised Yukos, his highly profitable oil firm. Yukos's assets were confiscated and sold to Rosneft, tripling its asset base in a stroke for the allegedly knock-down price of $9.5bn.
Putin's tightening grip on the energy sector has commercial as well as geopolitical implications. Private companies, which have driven exploration and development in recent years, will now find it more difficult to win licences and concessions; the Kremlin can be expected to award the most lucrative work to Gazprom and Rosneft. And while that is no bad thing if you are a minority investor in Gazprom and Rosneft, there are doubts that either firm will exploit its favoured status as effectively as it could.
Neither, despite its size, is famed for its productivity or profit margins: while Yukos and Sibneft used to enjoy 25 per cent annual growth in private hands, government-owned Gazprom and Rosneft were stuck in single digits. O'Sullivan believes their inefficiencies will be factored into their share prices. But he adds that Rosneft might have more trouble finding takers for its mooted plan to sell a further 25 per cent to a 'strategic investor': 'I don't see the likes of Exxon or Shell taking part in a Rosneft auction. I think the state having a dominant stake might put them off.'
Chris Weafer, an analyst at Alfa Bank, takes comfort from recent moves on the Kremlin's part to restructure the energy industry, introducing tax breaks and involving Gazprom in liquefied natural gas, which can be shipped for export.
But Weafer finishes with a word of caution for would-be Rosneft shareholders: the company is still facing litigation from Yukos's old shareholders, who argue that the break-up of their company was illegal. Should their claim succeed, it would have a devastating effect on the company's share price. 'An [out-of-court] deal will have to be done before Rosneft's IPO,' Weafer says. read more

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The New York Times: Gas Plant Faces Issue of Secrecy:

“Broadwater, a partnership of Shell and the TransCanada Corporation, wants to build the plant in New York waters…”: Sunday 8 January 2006
By JOHN RATHER
Published: January 8, 2006
AS a host of safety questions have been raised about Broadwater Energy's plan to build an immense floating liquefied natural gas plant in the middle of the Long Island Sound, its message to elected officials and the public has been consistent: Wait until the facts are in before making up your mind.
Now some of those facts are in, but the public may never get to hear them. Lawyers for Suffolk County say that crucial safety information about the plant has been stamped “secret” by the federal government, under regulations adopted after the Sept. 11 terror attacks that were intended to thwart sabotage of energy facilities. Connecticut's attorney general, Richard Blumenthal, the state's leading opponent of Broadwater, said he supported Suffolk County's stance against the plant.
Legal wrangling over the safety information is one of several issues Broadwater faces as it prepares to ask the Federal Energy Regulatory Commission for permission to go ahead with the project. The application first planned for mid-2005, is expected to be filed late this month or early next month.
In Connecticut, a task force on liquefied natural gas appointed by Gov. M. Jodi Rell is nearly ready to send her its report on the advantages and disadvantages of the plant for Connecticut, but members said they were having difficulty discerning whether the Broadwater gas would benefit the state.
Ms. Rell has said that Connecticut should have review power and a veto over the project even though it would be located in New York waters. Broadwater says Connecticut has no jurisdiction.
“Governor Rell is mindful of the potential security issues and risks surrounding this proposal, but she is equally concerned that the public has access to as much information as possible before final decisions are made,” said Judd Everhart, director of communications for the governor.
Richard Amper, executive director of the Long Island Pine Barrens Society in Riverhead and coordinator for the Anti-Broadwater Coalition, which has members in Connecticut and on Long Island, said Broadwater had been less than forthcoming about details of the project. “Part of our complaint all along has been that Broadwater is long on promotion and short on information,” he said.
Suffolk County's lawyers are demanding that the commission halt all proceedings related to Broadwater's proposal because the commission and state agencies “are unable to disclose certain information necessary to make the statutory determination required to authorize the project” as safe and in the public interest.
Because of the secrecy constraints, the lawyers argued in a letter to the commission dated Dec. 8 that there could never be a full public airing of how the $700 million plant, which would be 1,200 feet long and 180 feet wide, would be designed to withstand hurricanes, surging tides, accidents or attacks.
Broadwater contends that the secrecy poses no obstacle to approving the plant. In its reply to the county's claims, the company's lawyers said that while the classified data must be kept from the public, state officials directly involved in project reviews could have full access to it if they sign nondisclosure agreements.
Company officials said the approval process was as open as it could be under the circumstances.
“There is absolutely nothing secret about this,” said John Hritcko, senior vice president of Broadwater, in an interview on Tuesday. “Every major infrastructure project has to abide by this process.”
A spokeswoman for the commission, Tamara Young-Allen, said on Tuesday that the commission was still considering the matter and had not yet ruled on the county's request.
The document at issue, “Environmental Resource Report 13, Engineering and Design Material,” is being withheld from public view by the commission because of a rule it adopted in 2003 limiting public disclosures about liquefied natural gas plants, refineries, pipelines and other energy infrastructure.
In a telephone interview on Wednesday, Mr. Blumenthal said, “The broad and sweeping secrecy of this information because it is necessary for security proves the point that security and safety are at risk in this project.”
“It is powerful evidence of the susceptibility to terrorist attack and proves that the public interest is greatly endangered,” he added.
Mr. Blumenthal said that was all the more reason why the project was inappropriate for a crowded waterway in a highly populated area. “If they need this much secrecy, security must be really be at risk and they should put the facility somewhere else,” he said. He also said that his office did not want information about the project if it required signing a nondisclosure agreement. “We would rather not have the information if it means muzzling and censuring what we can say to the public,” he said.
Broadwater, a partnership of Shell and the TransCanada Corporation, wants to build the plant in New York waters, 9 miles off of Shoreham, N.Y., and 11 miles from Branford, and put it in service by 2010. It would receive imported liquefied gas from three or four tankers a week, warm it back to a gaseous state and feed it, at a rate of about one billion cubic feet a day, into an existing cross-sound gas pipeline owned by the Iroquois Gas Transmission System.
A new 22-mile pipeline would connect the plant to the Iroquois line, which runs from Waddington, in upstate New York, through Connecticut, under the Sound between Milford and Northport, N.Y., and ends in Commack, N.Y. An existing extension branches off at Northport and runs under the sound to the Bronx. Gas can be delivered to customers anywhere along the pipelines.
Proponents say the plant would deliver badly needed new supplies and help stabilize energy costs in the region. Opponents, including many elected officials in Connecticut and on Long Island, say the project would industrialize the sound and pose major hazards to people and the environment on both shores.
“The people of Suffolk County cannot be expected to take on faith Broadwater's assertions that their safety and other concerns have been addressed in classified documents,” said the county's Dec. 8 letter to the commission, signed by Charlotte Biblow, its lawyer. The Federal Energy Regulatory Commission “has determined that the engineering and design information about proposed new L.N.G. terminals, such as Broadwater, would be useful to terrorists or saboteurs because incapacity or destruction of an L.N.G. terminal would 'negatively' impact public health and safety,” she wrote. “This fact alone shows that the Broadwater project can not be found safe or in the public interest.”
The letter also asserted that Broadwater had offered no analysis of how the plant would survive “catastrophic winds, waves and high water caused by natural disasters.”
Mr. Hritcko said it was “absolutely not the case” that the need for secrecy meant that the Broadwater plant would be inherently unsafe. He noted that water treatment plants are covered by a similar rule, “but that doesn't mean they are any more dangerous.”
Broadwater's response, signed by Brett A. Snyder, a Washington lawyer, said that if the commission accepts the county's argument, “the nation would be denied all new sources of energy.”
William J. Lindsay, the presiding officer of the Suffolk County Legislature, said the county remained opposed to the project. The county executive, Steve Levy, said in a telephone interview on Tuesday that Suffolk should not be left in the dark.
But Broadwater picked up support from the New York City Council, which adopted a resolution on Dec. 21 describing the project in favorable terms, saying the gas it would deliver would be vital to the city, and calling for a review of the proposal.
In Connecticut, State Senator Leonard Fasano, a Republican from North Haven and chairman of Governor Rell's task force on the project, said government-ordered secrecy about aspects of it made him suspect it might be a more attractive target for terrorists than the commission and Broadwater are acknowledging. “They want to keep it out of the public eye because it very well may be a terrorist target,” he said.
Mr. Fasano said Connecticut had a strong case for seeking jurisdiction over the project despite its location just within New York waters.
“The jury is still out on whether or not we have a regulatory interest in it,” he said.
“The more I hear about this project, the more I am convinced the door is not closed on that issue,” he said.
“The supply barges may have to go through Connecticut,” Mr. Fasano said, referring to tankers carrying liquefied natural gas, “and I'm not convinced that the pipeline isn't going to have impacts in Connecticut.”
He said the task force report would comment on these issues, on the environmental and visual impact of the project, and on “the fact that this would be the first time that a significant portion of Long Island Sound would be allowed to be controlled by a business entity.”
Broadwater also has to deal with Iroquois's concerns about the proposed underwater pipeline connection. Among them are questions about whether operating problems at the Broadwater plant would shut down the Iroquois pipeline and interrupt its flow of gas, and questions about how to make imported gas compatible with the North American gas now carried in the pipeline.
But both Broadwater and Iroquois officials expect these and other technical questions to be resolved. read more

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Petroleum News: Oil found at Big Foot in deepwater Gulf

Week of Jan 08, 2006
Operator Chevron said Jan. 4 that 300 feet of net oil pay has been found at the Gulf of Mexico deepwater Big Foot prospect in Walker Ridge block 29 some 225 miles south of New Orleans.
The Big Foot No. 2 discovery well is in approximately 5,000 feet of water and was drilled to a total depth of 25,127 feet, encountering as much as 300 feet or more of net oil pay, Chevron said.
Drilling is under way at a sidetrack well and Chevron said further appraisal drilling will be required to determine commercial potential of the discovery.
Chevron, which owns a 60 percent working interest in Big Foot, is the operator; Anadarko Petroleum Corp. has 15 percent, Plains Exploration and Production Co. 12.5 percent and Shell 12.5 percent.
Big Foot follows Knotty Head
Ray Wilcox, president of Chevron North American Exploration and Production Co. called Big Foot the company’s “latest success in the deepwater Gulf of Mexico,” and said the discovery should “ultimately provide the country with much needed crude oil and natural gas.”
“Big Foot follows our earlier success at the Knotty Head discovery and is confirmation of further potential of our exploration acreage,” said Paul Siegele, vice president of Chevron’s Gulf of Mexico deepwater business unit. Chevron is the largest overall leaseholder in the Gulf of Mexico, the company said.
Bob Daniels, Anadarko senior vice president, exploration and production, said the Big Foot discovery, following the December announcement of the Knotty Head discovery (see story in Dec. 25, 2005, issue of Petroleum News), “further validates the extensive middle-to-lower Miocene play we are aggressively pursuing within the foldbelt area.” He said that including Anadarko’s wholly owned Genghis Khan discovery, the company was “successful in three out of four foldbelt exploration wells during 2005.”
Daniels said Anadarko expects to participate in five delineation and exploration wells in the first quarter of 2006. “The deepwater Gulf of Mexico will be a major piece of our overall growth plan in the coming years,” he said.
—Petroleum News read more

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.
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