Advice to Investors in Russia: Be Patient!

Sakhalin Energy suspended in Sakhalin-2 project
PRAVDA.Ru has already reported on the complicated relations between the Russian authorities and foreign investors concerning the development of the Sakhalin-2 oil and gas project. Russian Duma deputies blamed the operator of the project, the Sakhalin Energy company, for violations of the terms of the Agreement on production division. In response, Sakhalin Energy went on a kind of a strike: the company declared that it was impossible to start the second stage of the project. And the intrigue around the Sakhalin shelf still continues and even becomes more complicated.

Today, Sakhalin regional Governor Igor Farkhutdinov joined the intrigue; he held a press conference for Russian and foreign journalists. He told about a conference for gas and oil interests recently held in London. It was during the Sixth Oil and Gas conference in London that Sakhalin Energy Chief Executive Stephen McVeigh announced that the whole of the Sakhalin-2 project was under the threat of failure because of the non-constructive attitude of the Russian authorities and imperfection of the Russian legislation, especially in the sphere of the Agreement on production division. He said that if attitude of the Russian side (especially concerning improvement of the RF laws) didn’t change, Sakhalin Energy wouldn’t start the second stage of the project. Sakhalin Governor Igor Farkhutdinov explained today that several foreign news agencies spread false information; he says that statements of this kind are far from reality.

The Sakhalin governor said that the London conference was just an exchange of views. It is quite natural that operators of the project would like it to speed up the pace. And the Russian side shares this opinion as well, but from a different position. Unlike foreign operators of the Sakhalin-2 project, the Russian party is sure that the legislation on the agreement on production division, which is currently in force, is good and suits wonderfully the realization of the second stage of the project. The Sakhalin governor stressed that further steps of the project could be certainly negotiated.

It seems that Sakhalin Energy Chief Executive Stephen McVeigh has calmed down a little; he confirms that his company will soon declare the date that it is going to start the development of the Lunskoye gas field in the network of the Sakhalin-2 project. This information was confirmed by RusEnergy and director of the oil and gas department in the Sakhalin regional administration Galina Pavlova. She said that the beginning of the field’s development is scheduled for the first quarter of 2003. It is supposed that the first batch of liquefied natural gas will be produced in the settlement of Prigorodny, in the south of Sakhalin, in 2006. At that, Galina Pavlova also confirmed that the realization of the project’s second stage won’t be started in accordance with the scheduled terms. This is not because of a particular attitude of the local authorities towards the project. The explanation is even much simpler.

The problem is that two months ago, Sakhalin Energy submitted 300 volumes of the performance characteristics for the construction of industrial infrastructure objects to the RF Ministry of Natural Resources for an expertise. However, the ministry has not yet made a decision to set up a special expert commission for an expertise of the submitted materials. In fact, if the performance characteristics of the construction aren’t approved in the first quarter of 2003, realization of the project’s second stage won’t be started at the scheduled time, as the operators won’t have permits for really significant works.

Russian officials calls the situation “a suspension.” At first, investors are allowed to get as deep into a project as it is possible; at that, slightest and even average violations made by investors are ignored by the Russian side. If the investor gets nervous about the whole of the situation, he is then reassured with the saying that it is traditional in Russia to work “as it is convenient,” but not “as fixed in documents.” And when investors get seriously stuck into projects, the Russian side radically changes its attitude. Next, officials who were on friendly terms with foreign investors, start talking to them through clenched teeth; instead of inviting foreign investors for fishing or some other pleasant activities, Russian officials provide documents proving violations of the Russian legislation committed by the investor or some complaints from other officials. More and more reasons are put forward at that which hamper further work. If these actions make foreign investors even more furious, further measures applied toward them are even tougher. High ranking officials refuse to meet with foreign investors; instead, they say foreigners are to meet with officials of a lower rank, who in their turn prove to be even less compliant. They refuse visa documents earlier approved by higher authorities.

As a result, foreign investors get stuck in a really complicated situation: they are pressed by their own shareholders, who demand to immediately improve relations with the Russian officials and to continue working, or they demand reports about the spending by the current moment. It may sound strange, but in fact, it is easier to improve the relations than it seemed at first. As investors believe themselves, spending on the improvement of relations with the Russian officials are minimal in this case. On the whole, after both sides make some definite effort, the situation starts making some progress. That’s what the Sakhalin governor was driving at when he spoke at the recently organized press conference. That is why, as experts believe, there is no reason to worry about the Sakhalin-2 project. We should admit that the above-mentioned method of work with foreign investors is very archaic even for Russia. Isn’t this the reason why we have so few investors here in Russia?

Dmitry Slobodanuk PRAVDA.Ru

Translated by Maria Gousseva

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