Sakhalin Seizure Risks Discouraging Foreign Investment in Russia’s Energy Infrastructure

Sakhalin Seizure Risks Discouraging Foreign Investment in Russia’s Energy Infrastructure

On Dec. 22, the Russian government succeeded in its long-standing campaign to wrest control of the country's largest single foreign investment project -- the $22 billion natural gas development on the Russian Pacific island of Sakhalin. The project includes the first liquefied natural gas (LNG) plant and related export facilities built in Russia.

According to the deal, Royal Dutch Shell, Mitsui & Co., Ltd., and Mitsubishi Corp. will each surrender half of their shares in the Sakhalin Energy consortium. In their place, OAO Gazprom, Russia's state-controlled natural gas monopoly, has taken a majority (50 percent plus one share) stake in the project, paying a discounted price of $7.45 billion, as much as 20 percent below market estimates of the surrendered assets' true worth.

President Vladimir Putin's presence at the Kremlin meeting announcing the deal was only fitting. For months, Russian government agencies had been escalating the pressure on Shell and its partners to renegotiate their original contract, made at a time when energy prices were low and the Russian government was poor and weak. Under the original production sharing arrangement negotiated a decade ago, Shell enjoyed a variety of special privileges, such as an exemption from profit taxes until it had recovered the costs of its original investment. In return, it accepted the substantial risks of locating and developing Russian energy assets when the market outlook for the country's oil and gas was considerably bleaker than it is today.

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