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The Business Online: Royal Dutch Shell hit as Kremlin cans agreement

By Leia Parker Dow Jones Newswires
Sunday 24 September 2006
 
THE Kremlin and NGOs make strange bedfellows. But this new pairing suggests life is going to get tougher for Western oil companies in Russia as Gazprom’s grasp over the Russian energy sector tightens.

The Ministry of Natural Resources yanked a key environmental permit on Tuesday from the Royal Dutch Shell-led Sakhalin-2 project – effectively mothballing its huge second development phase to try to extract greater benefits from a production-sharing agreement with a Western company.

It’s a hypocritical move by a government that has long sparred with NGOs but is now piggybacking on their legitimate concerns about stewardship.

But then Russia, like other energy-rich countries, is more capable of throwing its weight around with oil prices hovering above $60 a barrel.

These hardball tactics contrast with the more market-friendly display earlier this summer, when state-controlled oil company Rosneft debuted on the London Stock Exchange.

Western oil companies apart from Shell are coming under pressure, too. Russia’s oil and gas production-sharing agreements also include Sakhalin-1, 30% owned by ExxonMobil, and the Kharyaga oil field north of the Arctic Circle, operated and 50% owned by Total.

Russian officials have refused to allow ExxonMobil to expand the boundary of its agreement after the company discovered one of its oil fields was larger than originally thought.

But it’s hardly unexpected. The Kremlin’s new axiom of domestic energy politics ensures Russian companies get a majority stake in all new oil and gas projects. Now, Moscow appears to be changing the rules.

The timing is advantageous for Gazprom. It agreed in principle last year with Shell to swap up to 25% of Sakhalin-2 operator Sakhalin Energy – in which Shell owns 55% – for 50% of Gazprom’s huge Arctic Zapolyarnoye gas field.

But the writing’s on the wall. Shell, along with other foreign operators, needs a company like Gazprom with pull in the Kremlin to smooth the way forward, even if it has to hold its nose at the negotiating table.
 

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