Pipes of Discord

Foreign Investors go on strike

Recently, the third international practical conference “Agreement on Production Division’2002: From Laws to Investment” finished in Moscow. During the conference, representatives of the Russian government, the State Duma, the Federation Council, authorities of the Russian regions where projects in the network of the Agreement on production division are realized, Russian and foreign businessmen discussed methods of improving the legislative basis so that it could be convenient for all parties. As soon as the conference was over, an international scandal broke out. The Sakhalin Energy Investment Co. (operator of the Sakhalin-2 oil and gas project) practically gave up realization of the second stage of the project.

Sakhalin Energy Investment Co. President Steve McVeigh said in London that the company couldn’t start realization of the project’s second stage valued at 8.5 billion dollars because of imperfection of the RF legislation in the sphere of the agreements on production division, Bloomberg agency informs.

To all appearances, Mr. McVeigh is disposed rather categorically. He says that the second stage of the project won’t start until necessary laws are passed. The problem is that all Russian laws in force and those which are still considered by the Duma deputies, “openly disagree with the conditions of the agreement on production division concerning the Sakhalin-2 project.” Steve McVeigh insists that the project won’t be realized while the  legislation is still vague; this sounds like an ultimatum to Russia’s authorities.

PRAVDA.Ru already reported about problems which foreign companies participating the Sakhalin-1 and Sakhalin-2 projects had to face.  As provided by the Russian legislation, up to 70% of Russia-produced equipment is to be used in the projects realized in the network of the agreements on production division. The Expert Metallurgy Council at the Duma’s Industrial Committee disclosed that respected international companies Exxon Mobil and Royal Dutch-Shell bought Japan-produced pipes instead of Russian ones for realization of the project. Even the fact that Russian metallurgical enterprises don’t produce pipes of required quality (the API standard, etc.) doesn’t bring Russian deputies to reason. On the contrary, they declared that soon new amendments to the law on the agreement on production division would be introduced, and the amendments would be strict toward foreign investors.

Royal Dutch-Shell is the main shareholder of Sakhalin Energy Investment Co., it owns 55% of its shares. The other two largest shareholders are Mitsui (25%) and Mitsubishi (20%). That is the explanation where the Japanese pipes are coming from. The conflict would have sense if Russia produced pipes of adequate quality itself, but it doesn’t. It means that German or American ones will be used in the project. At that, Japanese pipes are cheaper than German or American as transportation from Japan takes less time. What is the reason to quarrel then?

However, development of new oil fields isn’t like organizing international conferences. The art of cooperation with foreign investors is delicate; it was thoroughly studied in the country already in the Soviet era. And if deputies want to change a supplier, it means something even more than ordinary care about the domestic producers. And they don’t care that such maneuvers cause panic among investors. Russia is the country with the Great History and centuries-old bureaucratic traditions; and it’s already time for foreign investors to get used to it.

In the network of the Sakhalin-2 project the oil fields of Piltun-Astokhskoye and Lunskoye are developed; established resources of the fields are about 185 million tons of oil and 800 billion cubic meters of gas. And Russia has neither finance, nor equipment to develop these fields independently. However, development of the above mentioned fields is extremely important, as the fields would help to settle the energy problems of the Far East. In the theory, realization of the project would also bring currency earnings from oil and gas sales to Japan and other Asiatic countries. But as it turns out, the intentions declared by the Russian top officials and everyday economic practice are quite different things. At least, Russia will have to put off the idea of being an energy leader for some time.

Dmitry Slobodanuk

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Author`s name Michael Simpson