Van der Veer says Russian PSA model is key to oil investments

Royal Dutch Petroleum Co. Pres. Jeroen van der Veer Wednesday encouraged the Russian Federation to finalize its model for PSAs in order to facilitate the large investment needed to develop its hydrocarbon reserves and modernize its infrastructure. He said otherwise, the federation would have a harder time winning investments from international oil companies.


Darius V. Snieckus
OGJ Online

LONDON, Apr. 12 -- Royal Dutch Petroleum Co. Pres. Jeroen van der Veer Wednesday encouraged the Russian Federation to finalize its model for production sharing agreements in order facilitate the "massive" investment needed to develop its hydrocarbon reserves and modernize its infrastructure.

Speaking at the Russian Economic Forum, van der Veer said Royal Dutch/Shell was committed to the "long haul" in Russia, but cautioned that without a new PSA scheme anchored in a stable legal and fiscal regime the federation would have a harder time winning capital investment from international oil companies.

"All of the oil supermajors are evaluating their prospective projects on a worldwide basis much more carefully that even 2 years ago," emphasized van der Veer. "In this brave new world of global ranking, funds will migrate to those areas that offer the best trade-off between risk, return on investment, and long-term strategic goals.

"Russia must compete for her share of direct investment (because) international oil companies have real choices about where they choose to invest," he added.

Van der Veer suggested the so-called "grandfathered PSA" deal formulated by the Sakhalin II partners and Russia for the $8 billion Sea of Okhotsk oil and gas development served as a example of "how much can be achieved" once a project's legal and fiscal foundations had been laid. He said Sakhalin II, in which Shell holds 55%, was "already delivering enormous economic, political, and social benefits" to the Sakhalin region.

"It is our great hope that the practical win-win balance at Sakhalin II can be increasingly used as the model for other PSAs through the federation," said van der Veer. "It is difficult to overestimate the importance of fiscal stability to the success or failure of multimillion dollar investment projects."

He noted that the traditional commercial engagement strategies used by foreign oil companies in the past had often unraveled due to "unacceptable" investment risks.

The PSA for Sakhalin II�covering the Piltun-Astokhskoye oil and Lunskoye gas fields�provides protection for the development partners against changing fiscal regimes in Russia through the life of project, and divides revenues from "cost oil," returned to the investor and "profit oil," spilt between investor and state at an "agreed" level.

Van der Veer said Shell planned to make a final investment decision on Sakhalin II next year. He stressed that Shell had already committed nearly $1 billion toward Sakhalin II and, through the Caspian Pipeline Consortium, toward the recently completed Baku-Novorossiysk trunkline, and had firm plans to devote a further $5 billion to its outlay in Russia.

Shell, he said, was "keen" to invest in West Siberian gas fields including Salym, once a "stable PSA framework had been agreed and was in place."

Though he declined to comment on the specifics of Russian Federation President Vladimir Putin's reform program, van der Veer said it was "clearly the case that an open, engaged, and committed Russia will have positive commercial as well as political implications." He said restructuring and reform were important considerations for both business and politics.

Van der Veer acknowledged that Russia's reform agenda faced enormous challenges, but said it was "a critical and pivotal moment" in the development of Russia's oil and gas industry.

Van der Veer said foreign governments should encourage Russian reform. "It is also the responsibility of political leaders outside Russia to do more to promote this process, and to translate the principle of partnership into practical change on the ground," he said, pointing to European Commission President Romano Prodi's call last year for closer involvement with Russia to boost gas supplies to the European Union.

Contact Darius V. Snieckus at dsnieckus@ogjonline.com

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