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The Moscow Times: Oil Showdown on Sakhalin Island

Thursday, September 28, 2006. Issue 3507. Page 1.

By Miriam Elder
Staff Writer

YUZHNO-SAKHALINSK — Foreign oil majors and state officials squared off on Sakhalin Island on Wednesday, with Shell and ExxonMobil insisting that work on the island’s prized oil and gas fields was continuing as usual despite increasing state pressure on the multibillion-dollar projects.

President Vladimir Putin also weighed in on the debate, warning in televised remarks that the government would take appropriate measures against any oil firm breaching its license.

His comments came just hours after the opening of the 10th Sakhalin Oil and Gas Conference, where Foreign Minister Sergei Lavrov sought to assuage fears that threats to halt work at Shell’s Sakhalin-2 venture could be part of a wider campaign to give Russian state companies a bigger role in foreign-run oil and gas projects.

“There are no grounds for the opinion that foreign investors are being forced out of the fuel and energy sector,” Lavrov said.

Environmental inspections at Sakhalin-2 “do not mean that licenses will be revoked or canceled,” Lavrov told an audience of 400 oil executives, suppliers, local government officials and diplomats in the town’s only conference hall.

In recent weeks, Shell, ExxonMobil and Total, the operators of the country’s three production sharing agreements, or PSAs, have been targeted as the Kremlin has hinted at revisiting the terms of the decade-old agreements.
The Natural Resource Ministry’s threat last week to cancel Shell-led Sakhalin Energy’s environmental license — coupled with complaints about projects led by ExxonMobil, Total and TNK-BP — has stoked fears that the state is seeking to either dilute foreign participation in the country’s largest oil and gas projects, or change them to give the state a bigger slice of the profits.

Meeting with Natural Resources Minister Yury Trutnev in the Black Sea resort of Sochi on Wednesday, Putin said: “I am counting on the [Natural Resources] Ministry and the government as a whole making these decisions, including with regard to those companies that work in bad faith and don’t fulfill licensing agreements.”

Putin was speaking after Trutnev complained about oil companies leaving too many wells inactive.

While Putin did not refer specifically to Sakhalin, his comments — on the first day of the Sakhalin conference, and a day after Trutnev gave Shell one month to fix purported environmental violations or face a halt to its project — appeared to be a shot across the bow aimed at foreign oil majors.

Trutnev denied after the meeting that Sakhalin was discussed, Interfax reported.

Oleg Mitvol, deputy head of the Natural Resources Ministry’s environmental watchdog, flew to Sakhalin late Wednesday to open a round of monthlong inspections into purported damage to the island’s coastline, rivers and forests. He said his agency would decide by Oct. 20 whether it should revoke Sakhalin Energy’s environmental license.

“There are two possibilities: Either we shut down work if they refuse to fulfill the necessary requirements for environmental safety, or they take a look at the report and fix everything. Then they can go ahead as planned,” Mitvol said.

Sakhalin Energy CEO Ian Craig told the conference that he had still not received any official notification from state agencies, and added that he believed “the issue will be resolved very quickly.”

“There is nothing fundamentally wrong with the SEER,” Craig said, referring to the State Expert Environmental Review into Sakhalin-2, adding that he thought the approval was “highly unlikely to be revoked.”

“The ultimate test must be a court,” Craig said.

Mitvol and Craig were due to meet in Yuzhno-Sakhalinsk on Thursday to discuss the issue for the first time.

The government has been displeased with Shell since the company announced last year that the expected cost of Sakhalin-2 had doubled to $20 billion.

Government officials were quick to point out Wednesday that the project — which Shell runs with Japan’s Mitsui and Mitsubishi — is the only major oil project without any Russian participation.

“Why is Sakhalin-2 criticized and Sakhalin-1 isn’t? Because Sakhalin-1 has Russian participants,” said Valery Garipov, who heads the Russian Trade and Industry Chamber’s oil industry development committee.

“We need to involve a Russian participant,” Garipov told the conference.

Gazprom has been negotiating with Shell for a 25 percent share of Sakhalin-2 in exchange for a 50 percent stake in the Zapolyarnoye oil field in western Siberia.

Exxon’s Sakhalin-1 project also came under fire at the conference, with the head of another watchdog, the Federal Service for Ecological, Technological and Atomic Inspection, accusing the operator of gross violations.

Exxon Neftegas, an Exxon subsidiary, runs Sakhalin-1, while state-owned Rosneft holds a 20 percent stake in the project.

“Through inspections, we found that Russian law was violated in the area of industrial and environmental safety,” service chief Konstantin Pulikovsky told the conference. The company had failed to clear changes to the construction of the De Kastri terminal with his agency, he said.

Exxon Neftegas chief Stephen Terni said the company planned to start shipping oil next week after the terminal’s inauguration on Oct. 4. “The first export is imminent,” Terni said.

With oil prices holding at over $60 per barrel, the Sakhalin projects are more attractive than ever. However, under the existing PSAs, the government will see no major revenues until the companies recoup the large investments they have poured into the projects since the mid-1990s.

Officials have said they have no intention of revoking the PSAs, but have at the same time waged a very public campaign to belittle the accords as relics of another era. The PSAs, signed when oil prices were low and the country’s taxation system was in disarray, exempt foreign companies from regular taxes in a bid to tempt foreign investment into an unstable investment climate.

Mitvol also said his fight against Shell was part of a larger campaign to prove the country had left behind the lawless 1990s. “We’ve not been a banana republic for some time,” Mitvol said. “They’ve known there were serious problems since February and they haven’t done a thing.” He compared his agency’s campaign against the Shell-led consortium to BP’s stoppage of its Prudhoe Bay pipeline in Alaska in August. However, in that case, BP voluntarily shut the pipeline down for repairs.

Mitvol said Shell had failed to address concerns as “they know it’s cheaper to play the political card.”

Sakhalin Energy’s Craig said the company stood to lose around $10 billion per year in additional costs and delayed revenue if work on Sakhalin-2, the country’s largest foreign investment project, was stopped.

“It’s rather perverse to say costs must be reduced and then say more money must be spent on environmental safety,” Craig said.

Craig acknowledged that threats to Sakhalin Energy’s license could be linked to Shell’s ongoing negotiations with Gazprom to give the state-run company a share in the project.

“Perhaps it was used as a lever,” he told reporters on the sidelines of the conference. “It’s quite possible that those negotiations have influenced the political climate.”

Yasuo Saito, Japan’s ambassador to Russia, said the moves against Sakhalin Energy could harm the country’s image as a reliable source for energy. Japanese companies have a combined 45 percent stake in Sakhalin Energy, and the country is one of the main markets for gas from the project.

“This decision can be seen negatively by other partners of Russia” and dent the image of the country’s investment climate, Saito said.

Many of the participants at the conference — which has previously been held in London — seemed little concerned that foreign participation in Russia, the world’s largest oil producer, would soon come to an end.

And not all the residents of Yuzhno-Sakhalinsk — a small town whose dusty, unpaved roads belie the billions of petrodollars waiting to be harvested here — were particularly concerned that the foreign oil companies on which the island relies could be facing severe legal hurdles.

“These problems with Shell and so on — it’s neither hot nor cold,” said Oksana Ivanova, 29, who was standing in Yuzhno-Sakhalinsk’s main Lenin Square on an unseasonably warm day. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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