The Kremlin has once again forced the owners of a prize Russian energy asset to cede control. This time, the victims are Shell and its partners in the $20bn Sakhalin-2 gas project who have been pressed to surrender a majority stake to Gazprom, the gas monopoly.
Shell is still negotiating the terms with Gazprom, but should expect no favours. The Russians have the whip hand, and they know it. It is another poor day for the rule of law and the sanctity of contract. It bodes ill for other foreign groups in the Russian energy sector, not least BP, which through its BP-TNK joint venture controls the giant Kovykta gas deposit – another asset coveted by Gazprom.
The Kremlin was furious with Shell about cost-overruns, which had seen proposed investments double from $10bn to $20bn. This postpones the day when Russia receives any money because, under the original production sharing agreement, the foreign partners recover their costs first.
With the benefit of hindsight, the Kremlin sees this as a bad deal. But the agreement was struck in the early 1990s when Russia was weak and energy prices low. It is wrong to tear up the contract now, a decade later. The costs dispute should have been settled as envisaged under the PSA – by arbitration, not by expropriation.
Russian officials also claim Shell broke environmental rules. Doubtless, there were infringements. There always are in such huge schemes. But there is no evidence of large-scale law-breaking, even though Sakhalin-2 is Russia’s most closely monitored investment. The charges were little more than a public relations campaign aimed at softening up the target and concealing the Kremlin’s real motives, which are to secure control for Gazprom.
President Vladimir Putin sees Gazprom as the undisputed master of Russia’s gas, including all large new gas projects such as Sakhalin-2 and the Shtokman field in the Barents Sea. Next in line is likely to be Kovykta.
Quite aside from the legal and moral issues involved, this strategy risks damaging Gazprom and Russia. Gazprom lacks the managerial resources to run its existing project portfolio, let alone take on new ones. It is already too cumbersome to be properly managed. It needs to be smaller, not bigger. Gazprom has itself admitted it will soon struggle to meet growing export and domestic demand. Russian officials argue optimistically that they can close the energy gap by boosting non-gas energy sources and increasing consumer efficiency. Perhaps they can. But it would be unwise to stake Europe’s energy future on it.
The Kremlin must think again and about the role of foreign companies in Russian energy to ensure it has access to sufficient capital and managerial skill. This is not a matter of giving away assets to foreigners but of making the best use of Russia and the world’s dwindling energy resources.
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