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Shell Bemoans Uncertainty on Rights

The Moscow Times

The Moscow Times » Issue 4092 » Frontpage Top

Wednesday, February 25, 2009

By Anatoly Medetsky / Staff WriterYUZHNO-SAKHALINSK, Sakhalin Island — Foreign investors want more confidence about access to Russia’s energy riches before helping the country tap its far-flung fields, said Malcolm Brinded, a senior executive at Europe’s largest oil company, Royal Dutch Shell. 

Foreign energy majors that want to explore oil fields need to be sure that they will receive the rights to produce at them, which in Russia is no safe bet even with a local partner, said Brinded, executive director for exploration and production. 

“We are happy and confident with good Russian partners. We think that’s always the best solution,” he said in an interview with The Moscow Times. “But we would like to see more confidence … that if you explore you will be able to get on and develop.” 

The comments appeared to vent frustration with legislation that went into effect last year limiting investment in strategic assets. The two laws say the government may choose to compensate exploration costs and pay a bonus to a foreign company — or its joint venture with a Russian partner — that discovers hydrocarbon reserves large enough to be considered strategic rather than giving it development rights. 

The bonus could be as much as exploration costs, said Nikolai Gudkov, a spokesman for the Natural Resources and Environment Ministry. 

Even so, oil companies would strongly prefer producing the oil they strike, said Jonathan Hines, a partner at law firm Dewey & LeBoeuf. 

“They are not in the business of performing drilling services and just getting their money back,” he said. “They are in the business of getting a reward for the risk. 

“It’s a really sensitive issue. It’s a fundamental point.” 

If the government insists on compensation, the money “has to be some big multiple of expenses,” Hines said. 

Brinded was speaking at the Santa Resort Hotel, tucked at the foot of a hillside in Yuzhno-Sakhalinsk, which was recently bustling with foreign guests attending a ceremony to launch Russia’s first liquefied natural gas plant. The Sakhalin-2 project, which includes the plant, is controlled by Gazprom, with Shell and Japanese firms Mitsui and Mitsubishi also owning stakes. 

Speaking at the event, President Dmitry Medvedev reiterated that Russia was open to investment. 

It is in Russia’s interests to create conditions for sustained exploration as Soviet-era finds are being depleted, Brinded said. Potential new fields lie in remote corners of the country, such as eastern Siberia and the Arctic. 

“In a recession and in lower price situations, it’s very easy for exploration to stop,” he said. “And Russia is a country that needs exploration, especially because for its future production growth it will need more and difficult areas.” 

Brinded also spoke about the company’s other projects in Russia, and he said the government’s measures to mitigate the collapse of the oil price were disappointing. 

Shell, in conjunction with London-listed Russian partner Sibir Energy, operates Salym Petroleum Development in western Siberia, which produces 150,000 barrels of oil per day. Spokespeople for Shell and Salym declined to say whether the Russian venture lost any money in the last four months of 2008 because of high export duties, which didn’t decrease as quickly as the oil price. Salym ramped up production in those months. 

“I don’t think the government has shown its responsiveness on oil export duties to try to make sure that these fields continue to be economic,” Brinded said. “Obviously, revenues are important, but at the same time they want to stimulate investments and especially exploration.” 

The government cut the duties ahead of schedule twice last year and moved to a more regular schedule for revising them to help address oil companies’ concerns, although the measures were not enough to prevent massive losses. 

Russian oil companies lost at least $8.5 billion in the fourth quarter, German Khan, executive director of TNK-BP, said last week. 

Brinded said Russia’s first LNG plant, which will supply gas by tanker to Japan, the United States and South Korea, had reshaped the energy landscape in the Pacific. After long being the mainstay for Europe’s gas supply, Russia became a “strategically valuable” supplier of energy to an entirely new market, he said. 

“It really is a big move for them to be supplying gas directly to North America, for example,” Brinded said. 

Russian LNG will account for 5 percent of global supply. 

Tankers will start carrying the gas next month. The plant will run this year at about one-third of its annual capacity of 9.6 million tons of LNG. It is taking gas from an offshore field that, like the plant, is part of Sakhalin-2. 

The new Russian LNG will meet expected growth in demand for some customers or displace other deliveries, which can be easily rerouted, Brinded said. The LNG market is growing faster than any other major form of energy, despite the global recession, he said. Two new large customers, China and Britain, will come to the market in the next 12 months. 

“The world can absorb the additional Sakhalin supply without the need to shut in existing LNG suppliers,” he said, adding that LNG could be about half of globally traded gas by 2030. 

Once the plant is up and running, shareholders may decide to add capacity, Brinded said. 

“It makes sense to expect that there will be expansions here just as there have been at every other LNG plant in the world,” he said.

MOSCOW TIMES ARTICLE

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