Tuesday, December 12, 2006

Fings Break in Russia, Don't They?


Shell May Cede Control of Project To Russia's Gazprom

The “project” to which that headline in today’s Wall Street Journal refers is the Sakhalin-2, part of a 4.5 billion barrel-equivalent sub-Arctic oil and gas development off the coast of the former Soviet Union.

Sakhalin is a large island: look it up on a map and you will see it actually appears to be an extension of the islands which constitute Japan.

And that’s exactly how Japan thought of Sakhalin, too, until the Russians—pay attention here, I am making a point—forced out the Japanese at gunpoint after invading the island on August 11, 1945. Sharp-eyed readers will recognize that date as coming the week after Hiroshima and Nagasaki had been obliterated by atomic bombs.

That Joe Stalin really knew how to hurt a guy when he was down!

And so, it seems, does Vladimir Putin, today’s Strong Man at the Kremlin, who appears to have successfully muscled his country’s way into majority ownership of a major LNG project now that Shell has done much of the heavy lifting.

Readers may recall that Royal Dutch Shell could certainly use its 55% stake in Sakhalin-2 to replenish so-called “proved” reserves that became distinctly unproven several years ago after it was discovered Shell's engineers had been using Fannie-Mae-like juggling of its oil and gas reserves. Which is to say, Royal Dutch’s bookkeepers were making them up.

Smelling desperation, Putin’s men cleverly used a cost overrun for the Sakhalin-2 project as a device to muscle Shell out.

Like all good citizens with their backs to the wall in a dark alley and no recourse to either a gun or a passing officer, Shell is putting a very good face on the situation:

Shell has proposed ceding a controlling stake in the Sakhalin-2 project in Russia's far east to state-run OAO Gazprom, an official close to the situation said. Another person close to the talks stressed they are continuing and an agreement hasn't been reached. Such a move would underscore the Kremlin's opposition to foreign control of large energy projects in Russia at a time when an increasingly confident Russian state, buoyed by high oil prices, is determined to restore its domination of the country's oil and natural-gas industry.

So this is what it’s come to in a country with the largest untapped reserves of energy in the world: muckraking journalists get shot, anti-Putin KGB veterans get poisoned, and major oil companies like Royal Dutch Shell get squeezed out of large energy projects in the manner of the old Monty Python “Army Protection Racket” bit, in which Luigi and Dino Vercotti pay a visit to a starchy old colonel:

Dino: ‘Ow many tanks you got, colonel?

Colonel: About five hundred altogether.

Luigi: Five hundred! Hey!

Dino: You ought to be careful, colonel.

Colonel: We are careful, extremely careful.

Dino: ‘Cos fings break, don’t they?

Cononel: Break?

Luigi: Well, everything breaks, dunnit colonel?

Fings are breaking in Russia too.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


pondering said...

Which goes a long way as to explaining why we won't be leaving Iraq anytime soon. Since I like to stay warm in the winter, I'm glad somebody was thinking ahead of the curve three years ago.

Tim said...

This type of nationalization has gone on in Venezuela, Mexico, Iran, Iraq, Saudi Arabia, Syria, Libya, etc. If Shell's financial planning and analysis group doesn't have a risk model that anticipated this outcome (with the only real question as to how long the fun would last), they should be instantly fired.

This is a cost of doing business in oil. While characterizing it in cold-war era xenophobia makes for a decent headline, it's not at all reflective of the real issues here. Note that one of the reasons that we didn't build a pipeline from Alaska that went through Canada was a concern that our white, english-speaking neighbors to the north would nationalize the pipeline at some point in the future.

Peter King Rocks said...

I've written about this before - when do the corporations build their own military force to counter this 'squeezing out' and anything else that might jeopardize profits? I know that this is crackpot territory but if Shell had 500 tanks would Putin pull such a move?

AMIGA USER said...

Shell have got what they deserved, since they where unable to detect that conditions in Russia had changed, and that the grossly one sided deal signed by the corrupt Yeltsin government was now unenforceable.
You can have all the private property laws that you want,but if someone will not actively enforce them, then they are just bits of paper. The Shell deal was perceived by the general Russian population as just another example of how the west had robbed them of their assets.

question - corporations can have 500 tanks, but how long before the tank commander becomes the owner of the company?
Mercenaries fight only for money, and would no doubt demand a cut of the spoils if they where to risk their lives.

Aaron Koral said...

Jeff - One comment and one question on your post:

1) The money RDS spent in Russia would have been better spent buying a majority stake in STO; at least their reserves are proven;

2) Just wondering, what happened to RDS couldn't happen to BP could it? Readers can click here to see what I'm talking about (and I could be wrong, though)

A said...

Jeff, Sakhalin is historically a Russian island invaded by Japan in the beginning of the 20-th century (talk about kicking a weak opponent). I mean, there's no "L" in Japanse, come on...

Eleua said...

He did this to Pan American Silver at the Dukat silver project. Pan American developed the entire property, only to have Putin's buddies move them out at the end. Pan American got about 20 cents on the dollar.

Nothing new here.

Tahoe Kid said...

The world has proclaimed that the "Cold War" is over and we "won." It appears that the CW has moved into a different phase and Mr. Putin's DNA being what it is (Former Head of the KGB)would suggest he is still fighting the CW. After all, Putin was not some figure head political appointee of his country's spy machine like Bush 41. Instead, he spent time in Russia and East Germany doing what KGB agents do. And that does not include playing nice with the West.