Shell Forced to Yield Control of Sakhalin Project

Royal Dutch Shell has been under pressure over its Sakhalin-2 liquefied natural gas project for months from the Kremlin and its oil and gas arm Gazprom. Earlier today, Shell cracked and gave up its control of the project. While the Kremlin continues to consolidate its hold over Russia’s energy industry, it has also sent a very clear message to foreign investors: “Enter at your own risk.”

A decade ago, Russia agreed with Shell to a production-sharing agreement. Essentially, Shell got control of the project and wouldn’t have to pay Russia a kopeck until its exploration costs had been covered by the project’s revenues. Since Russia back then didn’t have the capital or the technology to fully exploit the situation, it took the deal. Then a short time ago, Shell goofed.

Deciding it had miscalculated the exploration costs, it told the Kremlin that the deal had to be renegotiated. Shell’s costs, it claimed, rose from $10 billion to $22 billion. Gazprom had kittens, and a program of harassment against Shell began. The company was accused of environmental damage, there were threats of criminal prosecutions, and loads of petty hassles appeared.

Shell’s 55% stake will now drop to a quarter, while Japan’s Mitsui & Co and Mitsubishi, Shell’s partners, will reduce their stakes 10% each from of 25% and 20% respectively. Gazprom will cough up some cash and some alternative sites for exploration. This was anything but a renegotiation.

For the Kremlin and Gazprom, this is a short-term victory that may cost them in the long term. While it isn’t the outright nationalization that Lenin imposed, it does look a lot like the government deciding that it would do as it pleased rather than discuss a problem. Shell, however, gave the Kremlin the opening by getting its figures so very wrong in the first place.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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