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#26 - JRL 2006-232 - JRL Home
Moscow Times
October 17, 2006
Foreign Investors Press State for Clarity
By Miriam Elder
Staff Writer

Foreign executives appealed to Prime Minister Mikhail Fradkov and senior economic officials for clarity and transparency Monday amid a major review of many of the country's largest foreign investment projects.

They warned that corruption, administrative barriers, entangled bureaucracy and selective application of the law were casting a shadow over the country's strong economy and scaring away potential investors.

Yet state officials failed to provide the clarity foreign investors sought.

"There is a strong sense of optimism here, but also a strong sense of nervousness," said Ernst & Young CEO James Turley, who co-chaired the conference with Fradkov.

Royal Dutch Shell CEO Jeroen van der Veer said the company had corrected all environmental problems at Sakhalin-2, a huge liquefied natural gas project that it is building with Japanese minority shareholders Mitsubishi and Mitsui. Sakhalin-2 ­ the country's largest foreign investment project ­ is under review for the purported environmental violations.

"Although the project has faced significant environmental challenges, we firmly believe these have been fully and transparently addressed," van der Veer said.

After meeting briefly with van der Veer on the sidelines of the conference, Natural Resources Minister Yury Trutnev appeared unsatisfied with Shell's efforts.

"If the company presents a plan to deal with environmental damage, then there would be no point in stopping the project. If such measures are not proposed, absolutely any sanctions are possible from our side," he said, without elaborating on what those sanctions might be.

The campaign against Sakhalin-2 has been seen as a means of putting pressure on Shell to increase the stake it is willing to give Gazprom in the project. So far, negotiations have centered on Shell giving state-run Gazprom a 25 percent plus one share stake in exchange for a 50 percent stake in Gazprom's Zapolyarnoye field.

Shell spokesman Maxim Shub said talks were continuing and there were no plans to increase the stake offered to Gazprom.

"We are now working to just evaluate the assets to be swapped," he said by telephone, declining to provide a timeline on when negotiations would be concluded.

Van der Veer reiterated the consortium's willingness to hand over a substantial stake to Gazprom, which has spearheaded the state's attempt to bring ever more oil and gas resources into its fold.

"We welcome the proposed entry of Gazprom into the Sakhalin-2 project," he said.

Van der Veer stressed that the state would need foreign participation if it followed through on plans to invest about $400 billion in the oil and gas sector by 2020, with the bulk of new developments coming in difficult locations in the Arctic Circle and Siberia.

No participants made explicit reference to Gazprom's shock decision last week to shut out foreign participants from development of the huge Shtokman gas field after years of negotiations.

But van der Veer said: "Fewer gas fields around the world can be developed by a single company.

"It's about forming partnerships," he said.

Trutnev's threat to revoke a key environmental license for Sakhalin-2's operator, Sakhalin Energy, was followed by warnings he would review similar projects by ExxonMobil and Total, sparking fears of a global review of foreign participation in the energy sector.

The deputy head of the Natural Resources Ministry's environmental regulator, Oleg Mitvol, attempted to level the playing field Monday, saying his agency would also review Gazprom's environmental record, without providing details on which projects he would look into.

"I promise that we are going to check out Gazprom," Mitvol said, Interfax reported.

Mitvol also said he expected to levy multimillion-dollar fines against Rosneft subsidiary Sakhalinmorneftegaz for its projects in Katangli and Okha, in Sakhalin's north, and warned that LUKoil stood to lose some licenses for failure to develop fields.

A decision on Sakhalin-2 could be made by the end of the month. Trutnev said he would fly first to western Siberia on Oct. 24 and then to the far eastern island of Sakhalin to review Shell's attempts at environmental progress. The visit will come just days after a team overseen by Mitvol concludes its own review of the site Friday.

Sakhalin Energy has said it stands to lose about $10 billion per year if work on the $20 billion project is stopped or delayed.

Van der Veer told the conference of the Foreign Investment Advisory Council that Shell was "confident" that all issues would be resolved through talks with the government.

State officials had few words of encouragement for the investors. Deputy Industry and Energy Minister Ivan Materov said he hoped the State Duma would by the end of the year discuss a bill regarding foreign participation in strategic sectors. The bill on subsoil use ­ which stipulates that the state must have a 50 percent plus one share in hydrocarbon development projects ­ has been stalled in the Duma for months.

After singing the praises of an economy that has seen 6.7 percent GDP growth and $27 billion worth of foreign investment so far this year, the prime minister assured the conference that, "we do not view government investment as an alternative to private investment."

The decision to go it alone at Shtokman, the country's largest gas field, shocked many investors into questioning whether the state still saw the need for large foreign investment, as capital continues to flow into the country in record numbers, riding on oil prices that remain well above $50 per barrel.

Foreign capital holdings increased by nearly 41 percent in the first six months of 2006, as compared to the same period last year, reaching $128 billion, Fradkov said. Foreign investment in the same period increased by 41 percent to reach $23.4 billion, he added.

Yet foreign executives raised a host of issues that they said hindered investment flows and harmed the country's image.

John Feldmann, a board member at German chemicals group BASF, decried selective and sloppy application of the law on value-added tax.

"VAT for years now remains the most pressing tax problem," he said, adding that the company had gone to court six times to prove VAT refund claims.

"Investment, before all, is a matter of trust," Feldmann told the conference, while calling on government officials to ensure a "transparent legal environment."

Complicated customs regulations, the crackdown on foreign alcohol products and convoluted tax regimes also made the agenda of foreign executives' concerns.

Economic Development and Trade Minister German Gref said the government would tackle their concerns within one year, without providing specifics.

The future of Sakhalin-2 and the country's other foreign oil and gas ventures appeared to linger over the conference, yet only Shell's van der Veer addressed the issue.

BP vice president Lamar McKay did not mention federal accusations of contract violations at the Kovykta field in eastern Siberia run by its Russian joint venture, TNK-BP.

He instead reiterated BP's desire for a "deep and long-term commitment to Russia," adding that he hoped restrictions on foreign oil and gas companies would be lifted.