Tuesday, December 12, 2006

Putin's Environmentalist Gambit

Hat Tip to Boots & Sabers for noting a blatant move back towards Communist style control of industry in Mother Russia. The Financial Times Fact Sheet and the Sakhalin 1 webpage both detail how foreign investment capital is building a massive oil and natural gas production facility on an island off Russia’s Pacific coast. With construction on phase 2 nearly complete, it appears the Russian government now wants control of the complex as investment makes the turn towards return on investment.

Russia: Gazprom Closes in on Sakhalin-2: The Russian government, through the Natural Resources Ministry, has orchestrated an investigation into Sakhalin Energy, the operator of the Sakhalin-2 natural gas and oil project in the Russian Far East. Following talks Dec. 8 between the head of Russian state-controlled energy giant Gazprom and Jeroen van der Veer, head of Royal Dutch/Shell (the majority stakeholder in Sakhalin-2), it appears that Gazprom is poised to gain a controlling stake in the project.

Gazprom monopolizes natural gas exports from the country and has near total control of production. Foreign control of the Sakhalin-2 project, achieved due to a 1990s-era production sharing agreement, has not only (in Russia's mind) robbed Gazprom of an asset, but it has also impeded the Kremlin's policy of imposing maximum control over the strategic energy sector. Under sustained pressure, Royal Dutch/Shell agreed to a deal in July 2005 that would allow Gazprom a blocking stake in Sakhalin-2 and give the Anglo-Dutch company a 50 percent share in the Zapolyarnoye field, a potentially productive asset connected to Russia's export infrastructure. However, cost overruns at Sakhalin-2 have caused Gazprom to reconsider the deal, and the energy giant has since adopted a much more aggressive policy.

After the Russian government's maneuvers to suspend licenses, press criminal charges and otherwise pressure Sakhalin Energy, Royal Dutch/Shell is looking like it will give up a 30 percent stake in Sakhalin-2 (of its original 55 percent), and the other shareholders -- Japanese firms Mitsubishi and Mitsui -- might give up as much as 10 percent each. The details of the final deal, which could be completed as soon as the first quarter of 2007, might never be made public; Royal Dutch/Shell is likely to be embarrassed by the terms, which will definitely not favor the company.

The fact, which should be carefully noted by the American business community, is when Russia decides to the make the move towards seizure of effective control, the strategy is to use the Natural Resources Ministry and an endless series of environmental bureaucratic harassments. The approach is not old fashioned government appropriation by force, but it is just as effective while keeping Western environmentalists silent. This is a very shrewd move by Vladimir Putin who is still KGB to the core.