SAKHALIN OIL AND GAS PROJECTS: WHAT IS BEHIND RUSSIA’S COERCIVE BEHAVIOR?

On September 18 a Russian high court ordered the temporary suspension of operations at the Sakhalin-2 oil and gas development project due to environmental considerations (Asahi Shimbun, September 18). The order followed a complaint filed by the Russian Ministry of Natural Resources, which claims that the project is violating environmental regulations. The Russian government seems to have since relented and told Sakhalin Energy Investment, the consortium that runs the project, that they have one month to correct the problems, but the threat of suspension remains (Vremya novostei, September 27). The Sakhalin-2 energy consortium is 55% controlled by Royal Dutch-Shell. The Japanese trading firms Mitsui and Mitsubishi control 25% and 20%, respectively. Thus far the project is experiencing massive cost overruns, thus depriving the Russian government of profits at a time of soaring energy prices. At the same time, the state-controlled Russian energy giant Gazprom is hoping to become involved with this and other projects on Sakhalin.

The Russian Ministry of Natural Resources is also asking Sakhalin Energy to review its planned gas pipeline routes, suggesting that certain portions be rerouted to avoid sensitive areas such as primary-growth forests, grey whale breeding waters, and salmon spawning areas. For months Gazprom has been in negotiations to acquire a 25% stake in Sakhalin-2 in an asset swap with Shell (Kommersant, September 20; Nezavisimaya gazeta, September 21). Shell has been hesitant to take Gazprom management up on their offer, but the pressure from the Russian government has been intense, and Shell will likely come to some sort of agreement. Gazprom has successfully pressured the Japanese to sell, and reportedly both Mitsubishi and Mitsui plan to sell small portions of their shares, so that the project can run “more efficiently” with Russian participation (Yomiuri Shimbun, September 22).

Gazprom is eager to get in on the Sakhalin action to meet growing energy demands across East Asia. Russian President Vladimir Putin recently told a group of foreign experts that Russia wishes to increase the level of its energy exports to the Asia-Pacific region from the current 3% of total Russian energy exports, to 30% over the next decade. Eastern Siberian development is still in its infancy, so the Sakhalin projects appear to be ideal sources to meet that goal.

Leaders in Japan and Europe have expressed their dismay about the Russian court decision. “A significant hold-up in this [Sakhalin-2] project, which is a symbol of Japanese-Russian cooperation,” commented Japan’s Prime Minister Shinzo Abe, “will have…negative repercussions on the whole of our relations with Russia” (Kommersant, September 20). Practically every major daily in Japan has called for the Japanese government to respond strongly to Russia’s “high-handed” behavior (Yomiuri Shimbun, September 18; Sankei Shimbun, Asahi Shimbun, September 20). Several European newspapers have expressed similar outrage; one even called Russia’s tactics “gas gangsterism” (Scotsman, September 21).

The other Sakhalin energy projects, including the Exxon-Mobil controlled Sakhalin-1 project, also appear to be under pressure. In August the Russian government announced that it wants to review the three major Production Sharing Agreements (PSAs) that it signed with Western and Japanese energy firms in the early 1990s (RIA-Novosti, September 21). This includes Sakhalin-2, Sakhalin-1, as well as the Kharyaginsk development project in Siberia, led by France’s Total (RIA-Novosti, September 21).

One Russian daily stated that although the Russian government had ordered a suspension of the Sakhalin-2 project ostensibly in the name of the environment, its actions are a “form of corruption,” because the government is clearly hoping Gazprom can muscle in on the project (Vedomosti, September 21). One respected Moscow daily wrote that there is an “open season” on foreign capital in the energy sector in Russia (Nezavisimaya gazeta, August 10).

These three PSAs were negotiated when the price of oil was hovering around $15 a barrel in the mid-1990s. At the time, the Russian government was eager to attract investment, and agreed to terms that were far less than they would be able to negotiate today. Under the PSAs, the Russian government can only see profits once the projects themselves begin to recoup their massive cost outlays. Costs for Sakhalin-2 have risen from $10 billion to $20 billion, meaning the Russian government is unlikely to see any profits in the near future. This must be particularly galling to the Kremlin, given the high price of oil. Meanwhile the costs of the Exxon-led Sakhalin-1 could rise from an initial estimate of $12 billion to $17 billion. The Russian government has strongly warned Exxon-Mobil that it would forbid any further spending on Sakhalin-1 (Reuters, September 21).

Exxon-Mobil is also facing environmental issues. The firm has been told that it cannot begin regular shipments of oil to the Asia-Pacific region from the Sakhalin-1 project until mid-November, when terminal inspections have been completed. The company is also under fire for a proposed gas pipeline to China from Sakhalin. In China, Exxon can get market rates for gas, while rates in Russia are below market value. Gazprom, however, has its own plans for a gas pipeline to China through the Altai highlands near the Kazakh-Russian-Mongolian border. Any Exxon-Mobil pipeline to China would be in direct competition with Gazprom’s strategy for supplying gas to China.

Putin has remained relatively quiet about these issues. Natural Resources Minister Yuri Trutnev met with Putin recently, and he denied that the Sakhalin projects were even discussed (Nezavisimaya gazeta, September 28). Some within the Russian government are reportedly concerned that Russia’s image as a place for investment could be dealt a serious blow now that the highest-profile investment projects seem under fire (RIA-Novosti, Wall Street Journal, September 27). However, Putin did issue a veiled warning to multinationals “unconscientiously” operating without regard for local ecology, suggesting that these firms could not expect to enjoy their privileges forever (Mosnews.com, September 28).

Some people have been willing to give the Russian government the benefit of the doubt. After all, Putin himself ordered a significant northward shift of the planned East Asian oil pipeline earlier this year, so as to avoid the sensitive Lake Baikal watershed. Perhaps the primary concern is indeed environmental protection. But it is curious to see the government-owned energy giant Gazprom lurking behind some of the court decisions and government actions that affect the Sakhalin energy projects.