#9 - JRL 7027
The Electronic Telegraph (UK)
January 20, 2003
Oil majors 'miss boat' by failing to tap into Russia's reserves Western firms now have to pay a premium for supplies from the world's top producer
By Malcolm Moore

Western oil majors keen on tapping the vast Russian reserves have "missed the boat", according to Simon Kukes, president of Russia's fourth-largest oil company, TNK.

Both Shell and BP have called on president Vladimir Putin to introduce legislation to encourage foreign investment in Russia, which is currently less than half that of Kazakhstan. However, there is increasing speculation that Mr Putin will fail to do so. But Mr Kukes said: "The best time for the Western companies was between 1997 and 1999. Now they have to pay a premium for the assets."

Russia, which recently overtook Saudi Arabia as the world's number one oil producer, has long been the focus of western oil firms, although without much success.

BP took a 25pc stake in Sidanco only to see TNK wrangle away most of the company's assets. Shell and Exxon Mobil are ready to pour billions into the frozen Sakhalin Island project, but have been held up by a lack of protective legislation.

At the heart of the problem lies the Russian government's delay on deciding whether to award Western companies Production Sharing Agreements (PSA), which allow a foreign company to invest without fear of changes to the tax regime. Shell has refused to spend $8.5 billion on Sakhalin Island until it is granted one.

The US ambassador to Moscow, Alexander Vershbow, has called for the legislation to be put in place. He said: "Among the most promising regions [for investment] are Sakhalin and the Far North. The realization of large-scale investment projects in these regions depends on State Duma's passage of legislation on production-sharing agreements."

Yukos, Russia's second-biggest oil company, opposes the use of PSAs in the pipeline. It believes the oil majors, such as Shell and BP, should take minority equity stakes in Russian companies in place of being granted PSAs. Mr Kukes said yesterday that Shell's quarrel over PSAs had "left a bad taste" in the mouths of policy-makers. "What is in it for Russia?" he asked. "Who needs the oil majors? They just want to drill a big hole, build a big pipeline, and get the oil out of Russia. They will not use Russian tools or benefit the local economy."

Mr Kukes, who met with Mr Putin last month, said: "President Putin understands this, that they do not want to build things in Russia, and he wants to grow the gross domestic product."

Nevertheless, on an official basis, TNK oil is one of the few companies pushing for PSAs to be given, although Mr Kukes freely admits it is for "selfish reasons".

The willingness of Russia oil firms to do deals is based on the fact that it is essential for Russia to start shipping more oil out of the country to avoid a glut at home.

Analysts estimate that Russian oil production may rise to as much as 11m barrels in the next decade, while domestic consumption for oil products will remain broadly static.