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Daily Telegraph: Kremlin ‘bullying’ leaves western energy companies furious

 Sakhalin II

(Sakhalin Energy extracts oil and gas from one of the world’s most inhospitable regions)

By Adrian Blomfield in Moscow
(Filed: 23/09/2006)

In the past few years, mention of Vladimir Putin at the dinner table of some western leaders could have brought on a case of indigestion. In the past week, though, the Russian president has been causing ulcers.
On Monday, Russia suspended an environmental permit for an oil and gas project led by Royal Dutch Shell on Sakhalin Island in the Pacific Ocean.

The international community has watched with queasiness as democracy in Russia has gone on the retreat and Kremlin assertiveness — neighbours might call it bullying — has grown.

But the move against Shell seemed to have confirmed the West’s worst fears about Russia’s trajectory: not only does the Kremlin seem intent on taking direct control of a vast and possibly dangerous energy empire, it seems prepared to do so by riding roughshod over some of the world’s most powerful multinationals.

There was fury in Europe, where memories of a gas crisis last winter — caused when Russia halted supplies to neighbouring Ukraine — are still fresh.

Already strained relations between London and Moscow have deteriorated further. The Foreign Secretary met her Russian counterpart in New York and delivered a stern protest, while the Prime Minister’s office has taken the matter up with the Kremlin directly. It is not hard to understand the consternation. Europe depends on its giant neighbour to the east for a quarter of its energy needs and suspicions are growing that Russia is prepared to use energy to gain political leverage over the West.

The latest crisis, though it will not directly affect supplies to Europe, is an unwelcome and dramatic escalation — not least because it again seemed to demonstrate the Kremlin’s indifference to property rights.

“Any delay to this project will have a serious impact on global energy security,” said a western diplomat. “Russia’s behaviour, if it doesn’t stop, will be hugely damaging to its reputation and for its future economic development.”

The row between the Kremlin and Sakhalin Energy, a consortium led by Shell but which also includes two Japanese companies, has been brewing for some time.

Development of the project began in 1993, when the government of Boris Yeltsin signed a production sharing agreement (PSA) with Sakhalin Energy to extract oil and gas from one of the world’s most inhospitable regions.

Then Russia was poor and desperately in need of foreign investment and the government quickly agreed to terms that meant the state would not recover revenues until the initial costs had been recovered.

Gazprom has been in negotiations to take 25 per cent of Sakhalin Energy in a share swap. Now it says — ostensibly because of the rising costs — it wants more.

Diplomats say the environment issues raised by the state are merely a pretext. After all heavily polluted Russia is not considered to be too hot on ecological issues, while one of the main reasons for the spiralling costs has been due to the rerouting of pipelines over rivers in Sakhalin and round a spawning ground for the endangered grey whale.

“There is an environmental problem, but it is not the main one,” said Sergei Markov, a Kremlin environment consultant. “There are Gazprom interests but that is not the only reason. The main issue is that the Sakhalin projects were signed away by an absolutely corrupt and pauper government. They are against Russian interests and should be terminated.”

Accused of greed by many Russians, Shell has defended its decision not to renegotiate its PSA with the government.

“The Russian party’s share of profit from tax and royalties over the life of the project is estimated at $50 billion (£26 bn),” said Ivan Chernyakhovskiy, spokesman for Sakhalin Enegry. Moreover there are immediate benefits such as the cash flow to Sakhalin and the creation of an 18,000-strong labour force.”

Government critics argue that the expropriation of foreign oil major concerns is likely to do no favours for Russia. Jobs will be lost, the resurrection of Sakhalin will be costly and time-consuming and profits are likely to be less substantial because Gazprom is so opaque and unwieldy.

It is Gazprom, referred to by many Russians as Kremlin Inc, which the West really fears. If it were a country, only Saudi Arabia and Iran would have larger reserves and there can be fewer companies so totally dominated by powerful politicians. Its chairman is Russia’s deputy prime minister.

It has long been rumoured that Mr Putin wants to take over as chairman of the company when he steps down in 2008.

Mr Putin has already stuffed Gazprom with his friends, including former German chancellor Gerhard Schroeder who runs a Gazprom subsidiary. If there is truth in the rumour, Mr Putin, would head not just a vastly wealth company but would continue to wield huge power over both the West, whose energy dependence on Russia is set to double over the coming decades, but also over large parts of Asia.

Mr Markov however said: “Putin as head of Gazprom — you must be kidding,” he said. “Gazprom is too small for him.”

Related Daily Telegraph article: The energy giants

(Filed: 23/09/2006)

• Sakhalin-2 (Shell, Mitsubishi and Mitsui)
Estimated to have 45 billion barrels of oil and substantial gas reserves. Environmental approval for the project withdrawn because of alleged ecological damage.

• Sakhalin-I (Exxon-Mobil, Rosneft, ONGC)

Estimated to have 2.5 billion barrels of oil and 17.1 trillion cubic metres of gas. Held up by Russian environmental watchdog and Gazprom.

• Kharyaga (Total, Hydro and Nenets)

The third and final PSA, Kharyaga, much smaller than Sakhalin. Estimated to have 57.4 million tonnes of oil.

• BP’S Kovykta

BP had hoped to turn this large gas field in Russia’s Far East into a main source of gas for energy-hungry China in a $20 billion project but cannot since Gazprom says it alone is allowed to export gas.

•Gazprom’s Shtokman: Gazprom needs technology to tap the field in the Arctic Barents Sea and liquefy natural gas to ship to America. Plans to choose foreign partners for the $20 billion project stalled this summer. The move came after US vice-president Dick Cheney accused Russia of using energy as a tool of intimidation and blackmail. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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