assessments

Russia: Prosecution as a Weapon against Foreign-Controlled Energy Projects

3 MINS READDec 6, 2006 | 02:39 GMT
Summary
The Russian Prosecutor General's office confirmed Dec. 5 that it will proceed with criminal charges against Sakhalin Energy, the Royal Dutch/Shell-controlled operator of the Sakhalin-2 project. Russian regional prosecutors are also threatening to suspend the Caspian Pipeline Consortium and its operator, Chevron Corp., accusing them of operating under an invalid license. The charges are an effort to facilitate the handover of the projects — the only ones in Russia owned by foreigners — to Russian state-controlled energy companies.
Russian Prosecutor General Yuri Chaika confirmed Dec. 5 that his office will press criminal charges against Sakhalin Energy, operator of the Far East Sakhalin-2 oil and natural gas project controlled by Royal Dutch/Shell. The operator is accused of inflicting large-scale ecological damage on Sakhalin Island by dumping toxic waste, deforesting and causing soil erosion. Meanwhile, Russian business daily Kommersant reported Dec. 5 that the prosecutor in the Novorossiysk region has determined that the Caspian Pipeline Consortium (CPC), which is operated by U.S. energy company Chevron Corp., has violated its licensing agreement. The prosecutor's office, conducting inspections alongside Russia's technology and natural resources oversight agencies, contends that the current license — valid until July 2007 — has become void due to a change in regulations that classify transporting crude as a hazardous activity. The Novorossiysk prosecutor warned CPC on Nov. 7 to comply with licensing agreements or be forced to shut down. Sakhalin-2 and CPC have one thing in common: They are the only energy projects on Russian soil that are operated by foreign companies. This makes them both an impediment to Russia's drive to consolidate control of its energy sector — a drive that has led various government oversight agencies to prosecute companies for environmental violations, back-taxes and improper licensing. While some of the charges might be valid, the Russian regulations are purposely convoluted to enable discretionary prosecution. Russian state-controlled natural gas monopoly Gazprom is vying for control of Sakhalin-2, looking to attain a 25 percent stake in the project from Royal Dutch/Shell. The foreign company is supposed to get a compensatory stake in another energy deposit, but the deal has stalled due to cost increases at Sakhalin-2. Although Gazprom no longer finds that deal attractive, it still fully intends to gain de facto control of the project. Gazprom will be the beneficiary of the prosecutor general's campaign against Sakhalin-2, which appears more and more likely to be shut down for its various violations. Meanwhile, Russian pipeline monopoly Transneft is due to sign documents in December to take over the Russian state's 24 percent stake in CPC. That would make Transneft the largest private shareholder in the consortium, overtaking Chevron's 15 percent stake. Transneft's goal with CPC is identical to Gazprom's vis-à-vis Sakhalin-2. If it cannot get control of the project by buying or seizing additional shares from other partners — Japanese shareholders Mitsubishi and Mitsui in the case of Gazprom and Sakhalin-2, and perhaps LUKoil, BP Amoco PLC or the Omani government in the case of Transneft at CPC — it will simply shut down the foreign-run project.

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