[R-G] Russia Blasts Oil Majors on Production + Oil Sees End of Sweet Deals

[Yoshie Furuhashi]

<http://ap.google.com/article/ALeqM5jofWlsI4cAthm1V7BFI2VURaXqNgD91TNE6G2>
Russia blasts oil majors on production

22 hours ago

MOSCOW (AP) — Three of Russia's oil projects, which all have foreign
participation, failed to achieve oil production targets in 2007,
Russia's Audit Chamber said Monday.

The state auditor said in a statement that the projects in question
were ExxonMobil's Sakhalin-I, Gazprom's Sakhalin-II and Total's
Kharyaga, all of which operate under production-sharing agreements.

Russia devised production-sharing agreements — which offer companies
more favorable contract terms — in the 1990s to lure foreign
investment into some of its more difficult and inaccessible oil
fields.

Russia, the world's second-largest oil exporter, saw production fall
this year as companies struggle under the burden of high oil taxes.
Parliament approved a raft of tax breaks for the oil sector last week,
starting from next year, after intense lobbying from oil companies.

The Audit Chamber also criticized the Russian government for its lax
supervision of the PSAs.

Letters have been sent to Exxon Neftegaz, Sakhalin Energy Investment
Company — Shell ceded control to Gazprom last year, but remains the
second-biggest shareholder — and Total. The auditor has also forwarded
details of its claims to the Finance Ministry and the Federal
Anti-Monopoly Service.

<http://online.wsj.com/article/SB121599585371849677.html?mod=googlenews_wsj>
Oil Sees End of Sweet Deals
Total, StatoilHydro
Accept Tough Terms
For Shtokman Field
By GUY CHAZAN
July 14, 2008; Page B5

LONDON -- The terms of a Russian contract to develop one of the
world's largest untapped natural-gas fields reveal the lengths to
which Western oil companies will go these days to gain a foothold in
the dwindling pool of new hydrocarbon resources.

In Russia's sector of the Barents Sea, the Shtokman field is hundreds
of miles offshore in Arctic, iceberg-strewn waters. But despite the
immense technical and investment challenges it poses, its 3.8 trillion
cubic meters of gas has proven a huge draw for oil companies desperate
for new reserves.

Last year, Russia's natural-gas giant OAO Gazprom finally chose two
Western energy firms -- Total SA of France and Norway's StatoilHydro
ASA -- to help it develop Shtokman, after years of negotiations. But
the terms are unusual for the oil industry, and unfavorable for
Gazprom's partners. The consortium developing the field -- early
estimates of costs top $20 billion -- won't own the gas in the ground
and will have to sell all that is produced to Gazprom.

"In most cases ... the starting point is that we want to market the
gas ourselves," Helge Lund, chief executive of StatoilHydro, said in
an interview. With Shtokman, "the companies involved are basically
taking a risk on future gas prices."

Some analysts wonder what exactly Total and StatoilHydro will get out
of their involvement in Shtokman if they can't own and freely sell its
gas.

The situation reflects the bind major oil companies find themselves
in. Much of the world's hydrocarbon resources are in places like the
Middle East that are largely off-limits to foreign investors. In
countries that haven't completely slammed the door, reserves are often
in the hands of state-run companies like Gazprom that are becoming
more assertive in their dealings with foreigners.

In the past, Western companies owned the oil and gas in the ground,
merely paying taxes and royalties to the host countries. But those
arrangements are becoming outmoded. Some in the industry think the
future lies in the kind of technical-service contracts in which
oil-field-service companies like Halliburton Co. and Schlumberger Ltd.
specialize. Under such deals, major oil companies would be unable to
book energy reserves, even though reserve growth is still one of the
key metrics analysts and shareholders use to evaluate an oil company's
performance.

Some companies have strongly resisted the move to service contracts.
But a few acknowledge the need for a rethink. Tony Hayward, chief
executive of BP PLC, told a conference in Madrid recently that the oil
industry needed to "move beyond the historical model that requires
ownership of reserves and production." He called for a new era of
"reciprocity," where the majors form partnerships with national oil
companies and help them expand internationally.

Shtokman reflects that new reality. Total said it will be able to book
the field's reserves -- but it won't own them. Gazprom insisted on
retaining sole ownership of the Shtokman license and will also take a
51% stake in Shtokman Development Co., which will finance and build
the infrastructure at the field. Total has 25% and StatoilHydro 24%.

The contract only relates to a third of the Shtokman license area,
though initial talks suggested it would cover the whole field.
Negotiations on Shtokman began in earnest in 2006, after five
companies were shortlisted: Total, Statoil, Norsk Hydro (which later
merged to become StatoilHydro), ConocoPhillips and Chevron Corp. BP
and Royal Dutch Shell PLC had taken a look at the project but decided
it wasn't worth it. Then in October of that year, Gazprom said foreign
companies could still take part, but only as contractors. Chevron said
the terms were unacceptable and dropped out.

A year later, after inconclusive talks with contractors, it changed
its mind again. Gazprom wanted to produce liquefied natural gas at
Shtokman and export it to the U.S., and to do that it needed the help
of a company like Total, a world leader in LNG. Also, StatoilHydro was
one of the few companies experienced at operating in the Arctic. But
this time, the terms being offered to Western oil majors were much
tougher.

Foreign companies would own the infrastructure but would have no
equity in the gas in the ground.

Gazprom ditched the original approach of developing Shtokman under a
production-sharing agreement, a type of contract common in the oil
industry. Under PSAs, companies shoulder all investment costs but can
recover them from the sale of oil or gas before having to share much
revenue with the government. But Russia had soured on PSAs, which it
felt were too favorable to the oil companies.

Total had in the interim softened its opposition to Gazprom taking a
majority stake in the Shtokman consortium. It accepted the principle
that the development company would sell Gazprom all Shtokman's natural
gas, as long as the price wasn't fixed but reflected current world gas
prices.

For Total, the upside of establishing a foothold in Russia outweighed
the disadvantages of the contract.

Write to Guy Chazan at guy.chazan at wsj.com