Russia's Government Suspends Work at Sakhalin-2 Oil and Gas Field, Threatening Foreign Contracts

Strategic Insights -

The Russian government has suspended work at the Sakhalin-2 offshore oil and gas field, operated by a consortium led by Shell, Mitsubishi, and Mitsui, under a production-sharing agreement (PSA). The move is worrying, as it may signal a broader assault on PSAs, potentially threatening other major foreign-run projects in Russia. The government's decision may be connected to Gazprom's attempts to join the Sakhalin-2 consortium, but it also raises concerns about the security of foreign investment in Russia.

Key Takeaways:

  • The Russian government has withdrawn an environmental permit for the Sakhalin-2 project, effectively halting work at the field, which was due to begin producing liquefied natural gas (LNG) from mid-2008.
  • The Sakhalin-2 project is the only major oil and gas project in Russia with no domestic involvement, and Gazprom has an outline agreement to acquire a 25% stake in Sakhalin Energy from Shell.
  • The withdrawal of the permit raises concerns about the security of foreign investment in Russia, as well as the stability of existing production-sharing agreements (PSAs).
  • The Russians' increasing unease with PSAs may be driven by a desire to reduce the advantages they grant foreign companies, which are seen as unfair and preferential.
  • The decision may also be connected to environmental concerns about the project's impact on the grey whale population.
  • The withdrawal of the permit is the strongest indication yet that existing contracts held by foreign companies in Russia might no longer be regarded as inviolable.

Statistics:

  • The Sakhalin-2 project has an estimated cost of US$20 billion, with Russia's government not set to receive any revenue until nearly all of the project's costs have been met.
  • The cost of the production-sharing agreement (PSA) is estimated to cost Russia US$10 billion, which is considered "unacceptable" by Yuri Trutnev, Russia's natural resources minister.
  • The Sakhalin-1 project, led by ExxonMobil, is facing cost increases and environmental challenges, which may be related to Russia's increasing unease with PSAs.

Sources:

  • "Country Briefing" by The Economist Intelligence Unit (no date specified)
  • Russian government statement, quoted in The Economist Intelligence Unit "Country Briefing" (no date specified)
  • Shell press release, quoted in The Economist Intelligence Unit "Country Briefing" (no date specified)
  • Environmental permit for the Sakhalin-2 project (withdrawn September 18th)