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Putin thaws on foreign firms as gasfield proves too big too handle

The Times

September 25, 2009

Carl Mortished: World Business Editor

Vladimir Putin played host to a dozen energy giants in a remote Siberian oil town yesterday, hoping to secure their help with developing the colossal gas reserves of the Yamal Peninsula.

Promising friendship and tax breaks, the Russian Prime Minister and former President told chief executives of some of the world’s biggest energy companies, including Royal Dutch Shell, Total, of France, and E.ON, of Germany, that he was inviting them to be long-term partners in developing Yamal.

The remote Yamalo-Nenets region contains one of the world’s biggest gas reserves, estimated by Gazprom at 16 trillion cubic metres — ten times the size of the UK’s remaining gas reserves.

Mr Putin’s warm welcome to the foreign oil companies was in marked contrast to the Kremlin’s concern only a year ago about conserving Russia’s strategic resources for Russians. Last year, in his final act as President, Mr Putin signed a law restricting foreign investment in 42 sectors, including energy. However, the recession is believed to have focused attention in the Kremlin on the huge cost of keeping the gas flowing.

Hosting yesterday’s meeting with the foreign energy companies in Salekhard, the capital of Yamal, Mr Putin said: “We would like you to consider yourselves participants in our undertaking. The main condition from our side is that partnerships should be stable and long-term.”

Also attending the Arctic meeting were ExxonMobil and ConocoPhillips, Mitsui and Mitsubishi, of Japan, Statoil, of Norway, ENI, of Italy, GDF-Suez, of France, Petronas, of Malaysia, and KOGAS, of Korea.

Mr Putin indicated that favourable fiscal treatment might be on offer.

Russia’s attitude towards foreign oil and gas investors has in the past been less welcoming. In 2006 Shell was forced to give up control of Sakhalin, a big liquefied natural gas project in Eastern Siberia, ceding half of its interest to Gazprom after a dispute over costs and alleged environmental violations.

TNK-BP, the joint venture that holds BP’s Russian interests, was also forced to hand over Kovykta, another giant gasfield, to Gazprom.

However, in June, Shell appeared to have found its way back into the Kremlin’s favour. The Dutch oil company was invited by Mr Putin to take part in a further development of Sakhalin while in the same month Total was given the chance to join Novatek, a Russian gas company, to develop a gas prospect in Yamal costing $1 billion.

Christopher Granville, a Russia analyst at Trusted Sources, the consultancy, said that project management as well as cash was behind the Kremlin’s change of heart. “There is a growing understanding that the ability to carry out major projects is something that these [foreign] companies can provide,” he said.

Gazprom is already investing huge resources developing Bovanenkovskoye, a huge gasfield in Yamal, and an 1,100-kilometre pipeline linking it to Gazprom’s network of pipelines bringing gas into Europe.

Gazprom is stretched financially with heavy borrowings and diminished cash flow because of the fall in gas prices in Europe. Last week Yuri Trutnev, the Russian Natural Resources Minister, complained that foreign investment rules were impeding Russia’s resource development. He accused Gazprom and Rosneft, the only two Russian companies engaged in offshore exploration, of underinvestment.

Meanwhile, foreign investors have complained that the resource threshold above which foreigners must relinquish control is a meagre 70 million tonnes of oil and 50 billion cubic metres of gas. Too low, they say, to be worth the effort.

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