Russia's Attack on Foreign Oil Companies: A Gamble of Honour, Money, and Control

Strategic Insights -

The Russian authorities' recent attacks on major foreign oil projects, including Shell's Sakhalin-2, ExxonMobil's Sakhalin-1, Total's Kharyaga, and Kovykta, operated by TNK-BP, have sent shockwaves through the international energy community. The moves, which include threats to revoke environmental permits and production licenses, are intended to advance Russian interests by increasing national participation and revising revenue-sharing arrangements in Russia's favor. However, the boldness of the official attacks is surprising, and the motives behind them are complex, involving concerns over production-sharing agreements (PSAs), ownership profiles, and the government's desire to increase Russian control over strategic oil and gas deposits.

Key Takeaways:

  • The Russian authorities' attacks on foreign oil projects, including Shell's Sakhalin-2, ExxonMobil's Sakhalin-1, Total's Kharyaga, and Kovykta operated by TNK-BP, are aimed at increasing national participation and revising revenue-sharing arrangements.
  • The moves are driven by concerns over PSAs, which are regarded as a stain on the nation's honour and highly unfavorable for the Russian government with regard to revenue distribution.
  • The government is seeking to increase Russian participation in the four projects, with Gazprom's interest in joining Sakhalin-2 and negotiating with TNK-BP over participation in Kovykta.
  • The attacks are not yet comparable to the Yukos affair, but the situation remains uncertain, with the outcome depending on whether there is common ground between the government's demands and the foreign companies' concessions.
  • The Russian government's efforts to establish Russia as a "reliable partner" in the energy trade and President Putin's push to achieve the gasification of the Russian Far East and increase oil and gas exports to Asia are at stake.
  • The fate of the foreign oil companies, particularly Shell, ExxonMobil, Total, and TNK-BP, remains uncertain, with potential implications for the projects' viability and the long-term stability of the Russian energy sector.

Statistics:

  • The Sakhalin-2 project has costs estimated to double to $20 billion, with the ExxonMobil consortium seeking a $4.2 billion increase in costs for Sakhalin-1.
  • The four projects have a significant gas component, making them interesting for Gazprom's core business and its goal of directing 30% of Russia's oil and gas exports to Asia within 15 years.
  • Russia's natural resources ministry has resubmitted its request to revoke the environmental permit for Sakhalin-2, with the federal industrial safety service, Rostekhnadzor, yet to take a decision.

Sources:

  • The Economist Intelligence Unit's Country Briefing, September 25, 2007
  • The Economist Intelligence Unit's Country Briefing, September 22, 2007
  • Reuters, September 25, 2007
  • Bloomberg, September 25, 2007
  • Financial Times, September 25, 2007