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The Guardian: Investors fear economic cold war as Kremlin eyes western assets

Energy: 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
Published: Sep 20, 2006

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 (pounds 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said ExxonMobil’s Sakhalin-1 project and Total of France’s Kharyaga oilfield in northern Russia may have their permits withdrawn for violating “technical” requirements, according to the Interfax news agency.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 pounds 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.

Gazprom, Russia’s state gas company, wants Shell to give it 25% of Sakhalin-2 in return for 50% of its Zapolyarnoye field in Siberia and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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