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The Moscow Times: Total’s Oil Field Comes Under Review

Thursday, September 21, 2006. Page 1.

By Miriam Elder and Tim Wall
Staff Writers  

Steve Voss / Bloomberg
State pressure on foreign oil companies intensified Wednesday as the Natural Resources Ministry said it was reviewing whether to revoke Total’s production sharing agreement for its Arctic Khoryaga oil field.

The announcement came just two days after the ministry revoked Shell’s environmental license at its Sakhalin-2 gas fields, calling into question the future of the country’s largest foreign investment project.

The review of Total’s project could sour a trip by President Vladimir Putin to Paris on Friday. Energy talks there are also likely to focus on Total’s bid for a place in Gazprom’s Shtokman gas field in the Arctic.

Some government officials have been calling for a renegotiation of decade-old production sharing agreements for oil and gas projects by Total, Shell and ExxonMobil.

The calls are being seen as a way for state-controlled energy companies to shoehorn their way into some of the country’s most lucrative fields.

Also Wednesday, Russia’s ambassador to Japan, Alexander Losyukov, touted Gazprom as a reliable partner at Shell’s Sakhalin project, telling reporters in Tokyo that the project would make quicker progress if a state-run company like Gazprom were to take a stake.

Natural Resources Ministry spokesman Rinat Gizatulin said late Wednesday that Total had failed to develop its field sufficiently, and that this had prompted the ministry to consider canceling the field’s production-sharing agreement, or PSA.

The case has been referred to the Federal Agency for Subsoil Use, which will look into the issue next week, Gizatulin said. “The investigation can result in one of two decisions — either the PSA will be rejected or we can negotiate to change the PSA,” he said.

Total owns 50 percent of the Kharyaga field in the Nenets autonomous district, and it has a current output of 20,000 barrels per day. Local authorities own 10 percent, and the remaining 40 percent belongs to Norway’s Norsk Hydro.

Total spokeswoman Patricia Marie declined to comment on the review late Wednesday. Earlier in the day she stressed that Total respected “every regulation in the PSA.”

So far, only Total’s PSA is under official review. PSAs are legally structured such that any change to them — including cancellation — must be done with mutual consent, leaving no room for unilateral action, said Stephen O’Sullivan, co-head of research at Deutsche UFG.

“PSAs were obviously going to be next in the firing line,” he said.

“PSAs are not seen as appropriate by this government for today’s Russia,” he said. “This is not going to lead to a cancellation of these projects, but the pressure is slowly being ratcheted up.”

Daniel Simmons, energy adviser at the Paris-based International Energy Agency, said it was “not so unusual” for the government to consider revoking an operating license over lack of progress with drilling.
“It’s a fairly standard reason for revoking acreage,” he said. “There’s nothing so sinister in that.”

Simmons said the signs in the country’s energy sector, however, were not looking good for investors.

“It’s all bad news for foreign investment coming out of Russia. It’s tough to know how much of this is justified.”

Officials have also accused ExxonMobil of violating environmental laws at its Sakhalin-1 project, the country’s third PSA.

On Wednesday, Exxon stopped filling a pipeline at its terminal on the island to make technical checks days before it was due to send oil through it, Reuters reported.

It was not immediately clear whether the stoppage was related to earlier calls by environmental officials for checks into the terminal. Exxon is due to start pumping 250,000 barrels per day through the pipeline.

The U.S. oil major has been wrangling with government officials for months over whether it has automatic rights to develop reserves newly discovered near the project.

At another oil project with foreign participation, TNK-BP’s Kovykta gas field in eastern Siberia, prosecutors have called for the company’s operating license to be revoked on environmental grounds, the Financial Times reported Wednesday, citing a source familiar with the situation.

TNK-BP spokeswoman Marina Dracheva denied that the company had failed in its obligations under the project. “We have not received any documents to that effect,” she said, referring to the FT report.

In New York on Wednesday afternoon, Exxon was trading at $64.95, down 55 cents, and Total was trading at $64.08, up 83 cents. In the Netherlands, Shell’s shares closed at 26.40 euros ($33.51), unchanged for the day.

Russia’s signed the three PSAs in the 1990s, inviting foreign investment through deals that pledged exemption from the then-unstable tax system.

The moves against Shell, Exxon and Total are being widely regarded by investors as a way for the state to restructure the terms of what are seen as outdated agreements.

Total is one of five Western oil companies seeking to grab a share of the Gazprom-led effort to develop Shtokman, a huge field under the Barents Sea thought to contain 3.7 trillion cubic meters of gas.

Shell has been in talks with Gazprom on an asset swap under which Gazprom would take a 25 percent stake in Sakhalin-2 in exchange for Shell gaining a 50 percent stake in the Zapolyarnoye gas field in Western Siberia.
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