Russia tries to rein in foreign oil firms

State withdraws approval for Shell's Sakhalin project· Gazprom rumoured to want half of BP venture Terry Macalister and Michael Mainville in MoscowTuesday September 19, 2006The Guardian
Shell and BP were facing legal wrangles and upheaval in Russia last night, raising doubts about the involvement of foreign companies in the country's oil and gas sector. Government approval for Shell's $20bn Sakhalin project was withdrawn and state-owned Gazprom was reported to be trying to buy half of the TNK-BP joint venture.
Russia's Natural Resources ministry said it had revoked the environmental approval for the major Sakhalin-2 scheme in the far east of Russia to "satisfy the arguments of the prosecutor's office" leaving the future of the scheme in doubt.


The prosecutor general's office alleged at the weekend that permission to develop the second phase of the Sakhalin island gas project had been granted illegally, but Shell insisted last night that it had done nothing wrong.
The growing pressure on Shell comes at a time when state-owned Gazprom has been trying to persuade the Anglo-Dutch oil company to sell it a 25% stake in Sakhalin-2 in return for some of its other Russian assets. The project has already proved difficult for Shell, with costs doubling, and mounting anger from environmentalists over potential damage to an endangered whale population.
Some interpret the permit issue as the latest attempt by Moscow to wrest back control of oil and gas assets held in the private sector while Gazprom acts as a political arm of the Kremlin. There have also been local reports that ExxonMobil's Sakhalin-1 oil project could face a similar fate.
Shell said it was continuing to work on Sakhalin, but admitted the removal of its environment permit might lead to more delays and further cost overruns.
"Although there have been various environmental challenges on this project, these have been tackled and largely overcome ... We are confident there are no valid grounds to revoke the order 600 [environment permit]," said the company.
Sakhalin-2 is one of two projects in the Russian far east run by western energy firms under production sharing agreements signed in the 1990s, when Russia lacked the resources to develop oil and gas projects on its own.
The other is the ExxonMobil project, which is 20% owned by state-controlled oil company Rosneft. With the Russian economy now booming thanks to high oil prices, many government officials have called for a revision of the Sakhalin-2 deal to include Russian participation.
"This is going to be interpreted by many as an attempt by Gazprom to enter the project," said Adam Landes, an oil and gas analyst at Renaissance Capital. "It seems to be a brutal way of renegotiating previous deals that were quite humiliating for Russia."
At the same time, Gazprom, which is the biggest gas group in the world, was said by Russian newspapers to be in talks to buy the holding in the TNK-BP joint venture that is currently controlled by three local Russian investors.
The partners in TNK, which has become a vital contributor to growing oil production at BP, are poised to receive the last of three $1.25bn instalments for selling part of the business to Britain's biggest company.
The Alfa Group, Renova and Access Industries are locked in to the joint venture until the end of 2007 under the terms of the sale agreement, but are then free to sell out to whoever they wish.
The Vedomosti business newspaper quoted Gazprom senior managers as saying they had held preliminary negotiations with the Russian TNK-BP investors. They are "not against selling their shares to Gazprom," one manager was quoted as saying. "It would be a good deal to develop our company's oil business,"added the unnamed source.
BP said it was aware of the reports, but did not want to comment. Gazprom would also not comment on the BP issue, but told the Guardian that it had nothing to do with environmental permits being withdrawn from Shell at Sakhalin. "We have heard this [about the permits] but our talks with Shell [on the asset sale] are going well," said a Gazprom spokesman.
Russia has taken repeated steps in recent years to consolidate state control over the energy sector, including the dismantling of Yukos, once Russia's largest oil company, and the imprisonment of its founder, Mikhail Khodorkovsky, on charges of tax evasion and fraud.
Backstory
Sakhalin-2 is the second stage of a huge oil and gas project in the far east of Russia. The island was formerly a penal colony for the tsars and was mentioned in the works of Chekhov. Along with Sakhalin-1, operated by ExxonMobil, the oil and gas schemes are the biggest direct foreign investments in Russia. Shell claims the Russian state stands to earn $50bn (£26bn) in tax and other benefits over 40 years. Already living standards in the Sakhalin region have risen by 500% since 2002 and driven unemployment down to a national record low of 1%, according to Shell.Special reportsOil and petrolUseful linksOpecInternational Energy AgencyAmerican Petroleum InstituteEnergy Institute