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Reuters: UPDATE 2-Kremlin says not trying to oust foreign oil majors

Wed Oct 4, 2006 8:59 AM ET
(adds quotes, Gazprom on Sakhalin-2, Exxon Sakhalin-1 loading)

By Elif Kaban

MOSCOW, Oct 4 (Reuters) – Russia is not seeking to oust foreign oil majors operating big production-sharing agreements (PSAs), but will not agree to massive cost overruns at these projects, a Kremlin official said on Wednesday.

Arkady Dvorkovich, head of the Kremlin’s economic research department, said Russia was particularly concerned by Royal Dutch Shell’s request last year to allow it to double costs to $20 billion at its Sakhalin-2 oil and gas project.

“It was obvious from the beginning that the Russian side would never agree with this,” he told a conference.

“We want to keep the existing costs structure and we want the ecological measures to be addressed,” he added.

Russia has stepped up pressure on Sakhalin-2 and the neighbouring Sakhalin-1 project, led by Exxon Mobil .

It has said it will not allow the projects to raise costs and thereby reduce the state’s profits. Environmental officials have also raised a number of grievances against the plans.

Many analysts have said they consider the rising pressure as part of a Kremlin campaign to regain control over the projects by forcing operators to sell out to state controlled firms.

But Dvorkovich denied that. “There is no such campaign. All companies in Russia are working to the same rules. The government is not playing any role other than law enforcement,” he said.

Dvorkovich was speaking days after the deputy head of the environmental agency, Oleg Mitvol, accused Shell of barbaric activity on Sakhalin and called for a halt to the project, saying Russia wanted damages for every destroyed tree or damaged river.

Investors do not know whom to believe, given the competing voices among the country’s numerous power-brokers.

Roger Munnings of international consultancy firm KPMG said the problems of Sakhalin-2 had “sent shivers around the boardrooms of the world.”

Tim Eggar, former UK energy minister who chairs the Russian British Chamber of Commerce, said: “Sakhalin-2 created uncertainty among foreign investors. It would be helpful if the government thought about how its measures are perceived in the world.”

The crisis has reinforced fears in importing countries over the security of Russian energy supplies following Moscow’s brief halt in January of gas flows to Ukraine over a pricing dispute.

The Sakhalin-2 consortium, Sakhalin Energy, has already pre-sold 98 percent of its output and any delay would hit supplies to customers in Japan and the United States.

Sakhalin-2 produces over 70,000 barrels of oil a day for half the year but plans to more than double that during phase-2 which involves the construction of the world’s biggest liquefied natural gas plant with 9.6-million-tonne annual capacity.

Royal Dutch Shell has a 55 percent stake as the operator. Japan’s Mitsui & Co. Ltd. <8031.T> has a 25 percent stake, and Mitsubishi Corp. <8058.T> 20 percent.


Shell’s Sakhalin-2 cost hike has also upset state-controlled gas monopoly Gazprom , which wants to swap one of its fields for a quarter of Sakhalin-2.

Gazprom’s export chief Alexander Medvedev told the conference that the gas monopoly Gazprom had not suspended talks with Royal Dutch Shell on the assets swap.

“We are continuing negotiations with Shell on joining Sakhalin-2. These negotiations are protracted,” Medvedev said.

He also ruled out Gazprom seeking control of Sakhalin-2. “The question of a controlling stake is not under discussion,” Medvedev said in reply to a question.

Analysts expect Russia’s tough line on production-sharing deals to continue as factions inside the Kremlin compete to grab a bigger slice of the nation’s strategic energy riches.

Also under the spotlight are the neighbouring Sakhalin-1 project operated by U.S. oil major Exxon Mobil , the TNK-BP joint venture involving Britain’s BP , and French Total’s Kharyaga project in Siberia.

Russia’s technical standards watchdog has said more checks were needed on Exxon’s Pacific terminal, while prosecutors have warned TNK-BP unit Rusia Petroleum, with the licence to the huge Kovykta gas field in Russia’s Far East, over violations.

Worries about delays to the launch of exports by Exxon’s project eased off on Wednesday when an industry source reported the company had begun loading the first export cargo of crude from Sakhalin-1.
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