Source Pravda.Ru

Pipes of Discord - 20 November, 2002 - News

Foreign Investors go on strike
Recently, the third international 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, and Russian and foreign businessmen discussed methods of improving the legislative basis so that it is 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 the second stage of the project.

Sakhalin Energy Investment Co. President Steve McVeigh said in London that the company couldn’t start the project’s second stage, which is 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 that are still being 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 has reported about the problems that foreign companies participating in the Sakhalin-1 and Sakhalin-2 projects had to face. According to Russian legislation, up to 70% of Russia-produced equipment should be used in the projects 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 the 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 will be introduced, and the amendments will 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 make sense if Russia produced pipes of adequate quality itself, but it doesn’t. It means that German or American pipes will be used in the project. At that, Japanese pipes are cheaper than German or American pipes, 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; 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. Russia has neither the financing nor equipment to develop these fields independently. However, the development of the above mentioned fields is extremely important, as the fields will help to settle the energy problems of the Far East. In theory, the realization of the project will also bring earnings from oil and gas sales to Japan and other Asiatic countries. However, as it turns out, the intentions declared by Russia’s top officials and everyday economic practices are quite different things. At least, Russia will have to put off the idea of being an energy leader for some time.

Dmitry Slobodanuk PRAVDA.Ru

Translated by Maria Gousseva

Read the original in Russian: http://economics.pravda.ru/economics/2002/7/21/64/3199_.html

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