The bullies get bullied,

national | environment | other press Saturday February 25, 2006 13:22 by Paul - . tarbhmaith at imagine dot ie

What comes around goes around

The economic pressures on shell will force them them to exploit their resources even more ruthlessly. The following is one way to deal with them. If they want access to the gas reserves off the Irish coast the Irish government should take a lead from the Russians on how to exploit the exploiters.

Representatives from Royal Dutch/Shell and Japanese energy firms
Mitsui & Co., Ltd., and Mitsubishi Corp. are meeting with Russian
state energy major Gazprom to discuss the future of the Sakhalin-2
petroleum project. Before all is said and done, the Japanese will be
out, Gazprom will control a very large share of the project, and Shell
executives will be extremely depressed.

Analysis

The three participants in the Sakhalin-2 petroleum project --
supermajor Royal Dutch/Shell, Japan's Mitsui & Co., Ltd., and
Mitsubishi Corp. -- are meeting with Russian state energy major
Gazprom on Feb. 21 to decide the future of their joint efforts in the
Russian Far East.

The Sakhalin-2 project is an offshore oil and natural gas project to
the east of Russia's Sakhalin Island that aims to provide liquefied
natural gas (LNG) for export throughout the Pacific Rim. The project
has been one of the single largest recipients of foreign direct
investment in Russia, and the tripartite consortium behind it
initially planned to spend $12 billion on its development.

At least that was the plan. In 2005, Gazprom, currently expanding its
reach and tightening its grip over Russian energy resources, bullied
its way into the project. Though the details are not finalized,
Gazprom will soon take 25 percent of Shell's 55 percent stake. Mitsui
and Mitsubishi will share the remaining 45 percent. In essence,
Gazprom told Shell the same thing it is telling nearly every other
foreign energy investor in Russia: Let us in, teach us the technology
and pay our way -- or we will have your project killed.

These are not idle threats. Gazprom Chairman Dmitry Medvedev is first
deputy prime minister, guaranteeing the firm sizable pull with the
Kremlin. In addition to being one of Russia's few oil majors, Gazprom
is also the state-ordained natural gas monopoly, giving it all the
market pull it needs. Some firms, most notably ExxonMobil, simply
boarded up their Russian shops and left.

But not Shell. The Anglo-Dutch supermajor has suffered a number of
defeats recently, but none more damning than a reserve accounting
scandal that would leave even the Enron team impressed. Shell
intentionally overstated its reserves by nearly a quarter -- an
offense that national regulatory bodies, not to mention shareholders,
do not take lightly. To be summarily ejected from Sakhalin-2 would
have poured fuel onto boardroom fires, and so Shell sued for peace. It
accepted Gazprom's offer that it dare not refuse in exchange for a
partnership with Gazprom at the Zapolyarnoye field on the Russian
mainland that would boost the supermajor's overall reserve holdings.

The first catch came almost immediately. No one ever expected an
offshore project in a region with no infrastructure and moving sea ice
to be easy or cheap, and costs have spiraled from the initial estimate
of $12 billion to $20 billion. Gazprom said this made its involvement
in Sakhalin-2 financially questionable, and that it would require
additional compensation.

The second catch arrived Feb. 9 when the Russian State Audit Chamber
alleged that Sakhalin-2 intentionally selected inappropriate suppliers
and contractors, cheating the Russian state out of $2.5 billion in the
process -- an amount the chamber suggested the Sakhalin-2 consortium
should reimburse. Although the audit chamber's decision has no direct
legal weight, it often is used by the Kremlin to float policy ideas
just before their implementation.

All this proved too much for the Japanese. They wanted to get in on
the ground floor of energy development in the Russian Far East in
order to secure non-Middle Eastern supplies. Between cost increases,
project delays (the first LNG shipment is now set for mid-2008), and
Gazprom's pressure tactics, they see no reason to continue with an
increasingly bad deal. That became doubly the case when Mitsui and
Mitsubishi discovered that the project would have trouble getting
financing even in Japan, where money tends to be no object. The Feb.
21 talks are all about how the Japanese can leave the Sakhalin-2
consortium with as much grace as possible (and ideally, still be able
to purchase LNG cargoes).

The question now is who gets the Japanese shares. Public discussion of
the topic from the firms involved indicates a sale to Shell is in the
offing, something the supermajor can certainly afford. Gazprom, in
contrast, is extremely cash poor, given that it is the Russian
government's largest taxpayer.

But just because Shell is the likely purchaser does not mean it will
end up holding all it buys. Gazprom has laid claim to Sakhalin-2, and
is likely to bet that Shell's board remains in dire enough straits to
capitulate once again. And Gazprom is probably right.

What is the bet that shell will be under even more pressure to squeeze profits from their other sites enabled by either corrupt governments or those who sell their people short.

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