Russia Wants Quick, Fair Sakhalin Deal -Envoy

Sakhalin II
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TOKYO, Nov 21, 2006 (Dow Jones Newswires)

Moscow wants a speedy solution to talks aimed at redressing an unfair 1990s agreement with foreign firms on the $20 billion Sakhalin-2 oil and gas project and increasing oversight of its spiraling costs, Russia's outgoing envoy to Japan said.

That's why state-controlled OAO Gazprom (GSPBEX.RS) is in negotiations with the consortium led by Royal Dutch Shell PLC (RDSB.LN) for a stake in the project, Ambassador Alexander Losyukov told Dow Jones Newswires late Monday.

Shell, Exxon Mobil and Total, which all signed deals in the 1990s that Moscow now says are unfair, have been under close Russian government scrutiny of late, with some saying say this pressure is part of the Kremlin's bid for greater control over Russia's energy wealth.

In September, regulators froze an environmental permit at the Shell-led oil and gas project on Sakhalin island in the Russian Far East, and they have threatened to halt all work on it due to alleged environmental violations.

Shell angered the Russian government last year when it announced that project costs had doubled to more than $20 billion. This shot down a proposed deal for Gazprom to enter the project.

"Having in mind the significance of that project for our national development, you have to understand that the government would probably be interested to participate somehow. That would give us more leverage to somehow follow the developments with the project - because the conditions of that deal were very unfavorable for us," Losyukov said.

Sakhalin Energy Ltd., the project's operator, is 55% owned by Shell. A subsidiary of Mitsui & Co. (8031.TO) holds a 25% stake and Diamond Gas Sakhalin, a subsidiary of Mitsubishi Corp. (8058.TO), holds 20%.

The envoy denied any political motivation in the enforcement of Russian law.

"The whole issue of the Sakhalin-2 problems have, obviously, been overblown and probably intentionally - to kind of attach political significance to it," he said. "There is no real policy behind this."

"The sooner it would be over, the better. But, at the same time, we cannot afford (the companies) breaking our laws and increasing the cost of the project without any limits. This is absolutely unacceptable," Losyukov said.

"They were discussing a 20%-30% acquisition (by Gazprom in the project). It was discussed before operators declared that the price of the project would be twice as big. That meant that you had to pay twice (as much) for the participation. Gazprom was not prepared for that. They are still discussing this," he said.

The Sakhalin-2 agreements and some other energy projects, signed when Russian state coffers were empty and investment was desperately needed, gave full control to foreigners and allowed them to recoup all their costs before paying any royalties.

The ambassador is expected to take up his previous post as a deputy foreign minister responsible for the Asia-Pacific region and as Moscow's lead negotiator to the six-party talks on Pyongyang's nuclear weapons program. The six include Russia, the U.S., North and South Korea, China and Japan.

Losyukov, who departs Sunday, officially took his post in Tokyo in May 2004.

Copyright (c) 2006 Dow Jones & Company, Inc.


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