- The Washington Times - Thursday, December 21, 2006

Russian gas giant Gazprom paid Royal Dutch Shell Co. $7.5 billion yesterday to gain a majority share and control over the world’s largest oil and liquefied gas project — for the first time moving to consolidate the state’s control over strategic energy assets at the expense of a top Western company.

Under pressure from the state, which charged Shell with numerous environmental and contract violations, Shell ceded half of its 55 percent original share and leading role in the project to state-controlled Gazprom, retaining only a 27.5 percent interest and role as “technical adviser.”

The deal gained Gazprom its first toehold into the potentially lucrative global market for liquefied natural gas exports while tapping into Western technologies it does not now possess.

In announcing the deal at the Kremlin yesterday, President Vladimir Putin made it clear that it was meant to enhance and extend the power of the state gas monopoly while ensuring a steady stream of tax revenue from the project and settling environmental charges.

“We will do everything possible to assist you,” Mr. Putin said to Gazprom Chief Executive Officer Alexei Miller, according to RIA Novosti, the Russian news agency. Mr. Putin’s deputy, Dmitry Medvedev, is chairman of Gazprom’s board of directors.

Apparently referring to the lingering threat that the state will sue Shell for as much as $30 billion in environmental damages even after the company takes steps to remedy deforestation and water quality problems, Mr. Putin added: “I am certain that we can overcome all difficulties if all sides show good will.”

Shell Chief Executive Officer Jeroen van der Veer, who was silent through months of wrangling with the government and Gazprom that threatened to delay the project, said the deal ensures that the company’s $12 billion of previous investments in Sakhalin-2 along with Japanese partners Mitsubishi and Matsui won’t go for naught. Mitsubishi’s and Matsui’s respective stakes of 20 percent and 25 percent also were halved under the deal.

“Our first priority is to get Sakhalin-2 up and running,” Mr. van der Veer said. “This agreement is an important step forward, and positions Sakhalin-2 for further growth opportunities.”

Sakhalin is the largest integrated oil and gas project in the world and Russia’s first liquefied gas facility.

Shell had already contracted with Japan, South Korea and U.S. West Coast buyers to purchase liquefied gas from the project when it is ready for shipment in 2008. Shell already is producing oil from the north end of Sakhalin Island and shipping it during the summer months when shipping lanes are free of ice.

The deal bodes ill for ExxonMobil, which is leading the Sakhalin-1 oil project, as well as BP and other Western oil companies with major projects in Russia who have also come under the gun recently from the government. Many Western analysts think the government is enforcing environmental and tax laws selectively in a transparent attempt to intimidate Western investors into making major concessions.

“There’s a new reality in Russia; majority foreign-owned investment doesn’t work anymore,” said Michael Bradshaw, a geographer at Britain’s University of Leicester.

It is only the latest move by the Kremlin to cement its control over strategic energy assets that produce about half of government revenue and feed the payroll of the 40 percent of Russian workers who are employed by the government.

The Sakhalin-1 project already has yielded the government $600 million in royalties and fees.

In an important concession wrung by the government, the oil companies agreed to absorb cost overruns in the future, to ensure the government’s revenue stream is not impaired. Shell had angered the government last year by announcing a doubling of costs that ate into government revenue under the earlier agreement.

The seizure of control over Shell’s Sakhalin project follows the government’s seizure and dismantling of Russia’s leading oil company, Yukos, and the jailing of its Chief Executive Officer Mikhail Khodorkovsky on tax evasion charges in 2004.

It is part of a trend worldwide of states taking control over energy resources, which has helped to keep oil prices high.

Venezuela and Bolivia also recently announced plans to seize assets and renegotiate contracts with Western oil companies. The moves have led to a major slowdown in oil development in those countries despite a general shortage of crude production worldwide.

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