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The Wall Street Journal: Russia to Review Agreement License With Kharyaga

September 20, 2006 11:38 a.m.

MOSCOW — Russia’s Ministry of Natural Resources said Wednesday that it had officially begun the process of reviewing the Kharyaga production sharing-agreement license for possible cancellation.

The license may be canceled due to underdevelopment of the field, the official, Sergei Fyodorov, head of the ministry’s government policy department, told Dow Jones Newswires.

France’s Total SA, the operator of the field with a 50% participating interest, said it couldn’t comment immediately on the statement.

Norway’s Norsk Hydro ASA has a 40% interest in the project and the regional Russian oil company Nenets has a 10% interest.

Mr. Fyodorov said the question of canceling the license had been officially passed over to the Federal Agency for Subsoil Use, or Rosnedr. He didn’t say when a decision might be expected.

Total and Russia have sparred frequently in the past over the rate of development at the project, and have even taken the case to court. If the license is pulled, it may be auctioned off, the official said, saying that only a court decision could return the license to its current operator.

A spokesman for the Ministry of Natural Resources said the Kharyaga license is the only production sharing agreement, or PSA, license in Russia so far turned over to Rosnedr for review.

The ministry on Monday said that all three licenses could theoretically be annulled because the operators weren’t meeting the terms of the PSAs.

Russia’s two other PSAs, located on the Pacific coast and known as Sakhalin-I and Sakhalin-II, have faced different kinds of administrative difficulties in recent days.

The Ministry of Natural Resources pulled a key environmental permit for Royal Dutch Shell PLC’s Sakhalin-II oil and gas project this week, while Exxon Mobil Corp.’s Sakhalin-I hasn’t been allowed to expand the boundary of its PSA to include additional reserves found in one of its fields.

Kharyaga currently produces about 20,000 barrels a day of oil equivalent, according to Total. Targeted output is around 30,000 barrels a day, although Total says output remains limited due to transportation capacity restraints.

The project represents only a small part of Total’s total 2.3 million barrels a day oil output, but is the company’s only project in Russia. Total is also bidding to join Russian natural gas monopoly OAO Gazprom’s massive offshore natural gas project known as Shtokman.

Mr. Fyodorov said current production at Kharyaga is less than a third of the output volume for 2006 called for in the project, however, and too few wells have been drilled at the site.

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