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Kommersant: Russian Pres. Aide Suggests Foreigners Forego Product Sharing

Russian presidential aide Igor Shuvalov said at a briefing at the RIA Novosti news agency yesterday that it was desirable for participants in product-sharing agreements to convert to a “national procedure.” He suggested that the participants in the Sakhalin 2 project could thus solve their problems with Russian agencies.

Russian authorities have repeatedly expressed dissatisfaction with the work of foreign companies within product-sharing agreements. This is the first time changes in the agreements have been suggested and it is connected with Russian authorities’ wish to monopolize Russian gas deliveries to the world market fully.

Shuvalov was speaking in defense of Sakhalin Energy, the operating company of the Sakhalin 2 project, which was threatened with the loss of its license the same day because of claims against it by Rosprirodnadzor, the federal natural resources supervision agency. “I don’t see why do it so that everyone is frightened away again,” he said. “If they want to talk that it is a targeted attack,’ I don’t see any bases for that.”

Instead, he suggested another way to pressure organizations working under product-sharing agreements. “It all could be done completely differently,” Shuvalov said, “using other mechanisms that, on the contrary, would make our life easier and not ruin our reputation.” He said that proposals could be made to participants in product-sharing agreements to leave them in legal ways foreseen in their agreements and “transfer all projects to national taxation procedures.”

In the early 1990s, when oil prices were low and conditions were unstable in Russia, product sharing was a good way to attract foreign investors. There are three projects in Russia now being carried out on a product-sharing basis. They are mainly controlled by foreigners. They are the development of the Kharyaga field (operator Total, co-owners Hydro and the administration of the Nenets Autonomous Area) and two projects on the shelf of the Sea of Okhotsk, Sakhalin 1 (operator Excxon Neftegaz Ltd., co-owners ExxonMobil, ONGC, Sodeco and Rosneft) and Sakhalin 2 (operator Sakhalin Energy, co-owners Shell and Misui Mitsubishi). Russian shares are negligible in these projects (Rosneft has 20 percent in Sakhalin 1 and the Nenets administration has 10 percent at Kharyaga.

Legal experts say that product-sharing agreements would be hard to break unilaterally. Russian authorities have means of applying pressure on agreement participants, however. The suit filed by Rosprirodnadzor in Presnensky District Court in Moscow is the most vivid example of that pressure and could have catastrophic consequences for the project. By transferring the projects to “national procedures,” they would automatically be made subject to the new law on natural gas exports, meaning that only Gazprom could export the natural gas or liquefied natural gas produced by the Sakhalin projects.

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