Infrastructure For General Use

Russian legislation allows the state to pick the pockets of foreign investors on legal grounds

It seems that foreign investors are unlucky with the joint projects Sakhalin-1 and Sakhalin-2. The other day a high ranking Russian official confirmed that there were considerable reasons for foreign investors to worry about the fate of their money invested in development of the Sakhalin shelf.

The 4th  Russian Annual energy summit was held in Moscow last week. Russian Deputy Minister of Energy Vladimir Stanev told foreign investors at the summit that infrastructure of the Sakhalin-1 and Sakhalin-2 projects, which foreign investors construct for themselves with their own money, in fact would be the infrastructure for general use. The information was provided by RusEnergy.

PRAVDA.Ru already reported about difficulties which foreign investors faced when they started development of oil and gas fields on the Sakhalin shelf. The problem is that Russian Duma deputies strictly criticized operators of both projects. According to the Russian legislation on agreements on production division, up to 70% of equipment used at the projects carried out in accordance with such agreements, must be of Russian production. As it turned out, Exxon Mobil and Royal Dutch-Shell (the main shareholders of the projects’ operators) buy Japanese pipes for realization of the projects. Which by the way is quite logical: Russian metallurgical enterprises don’t produce such pipes and it takes little time to deliver these pipes from Japan. Besides, Japanese companies are also shareholders of the projects’ operators. But the deputies ignored these serious arguments. Instead, they threatened that they would toughen the law on agreements on production division. In response, operator of the Sakhalin-2 project, Sakhalin Energy company, threatened it would stop the works on the project. Later the company relaxed its position concerning the problem. However, the main contradiction between foreign investors and Russian authorities still remains: foreigners dislike the law on production division agreements.

RusEnergy reports, deputy Vladimir Stanev considered the possibilities of export of oil from the Sakhalin shelf, which will be produced in the network of Sakhalin-3 and Sakhalin-8 projects; the deputy thinks that pipelines which are currently under construction, will lead to a prospective terminal in the Bay of Perevoznaya on the Pacific coast. The terminal will be built by the Russian state-run monopoly Transneft; it is also to be a terminal point of a pipeline which is planned to be laid from the city of Angarsk along the Baikal Amur main line. 

Russian deputy minister of energy said that the above mentioned projects would use the routes built for the Sakhalin-1 and Sakhalin-2 projects at the beginning, but further they wouldn’t do without the route which would be developed by Transneft in Primorye.

This intention voiced by the Russian deputy sounds like a nightmare dream for western businessmen who are used to acting in accordance with the western business ethics. It turns out that Exxon Neftegas, the operator of the Sakhalin-1 project, spends its money on construction of an oil pipeline leading to the port of De Kastri in Russia’s Khabarovsk region. Sakhalin Energy, the Sakhalin-2 project operator, will spend its money on construction of gas and oil pipeline of 700 kilometers in length which will lead to an enterprise producing liquefied natural gas and to a prospective oil export terminal near Korsakov. At that, each of the companies plans to construct the pipelines for transporting their own products. However, the Russian official says that in accordance with the Russian principle of equal access, other companies can also use the pipelines.

Western people understand this position as a flash-like expropriation on “legal” terms. As it turns out, the Russian Ministry of Energy has the right to dispose of private foreign pipelines as it likes. Moreover, as it is fixed in the federal law “On natural monopolies”, Russian officials can regulate the tariff on oil pumping in such pipelines.

Naive foreigners think that it is an awful mistake and they again and again try to explain to Russian officials that it’s impossible to act like this. They provoke international scandals and threat to go on strikes with a view to make Russians change their laws. As RusEnergy reports, the State Duma isn’t even going to review the law “On natural monopolies”. On the contrary, the deputies consider how to toughen the law “On on production division agreements.”

Russian law makers don’t care how foreign investors will feel in Russia after that. And foreign investors that have already joined development of the Sakhalin shelf will have to add extra expenses into the projects’ estimates, which are explained by presence of hangers-on. How are they to explain it to their shareholders? God knows. It is highly likely that they will have to re-direct all questions to the Russian leadership, which in its turn promises naive foreigners that very favorable climate and conditions will be soon created for foreign investments in the country.

Kira Poznakhirko

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Author`s name Michael Simpson