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    Journey To Sakhalin:: Royal Dutch/ Shell in Russia (A), (B) & (C)

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    shahin selkar
    Russia has vast oil and gas reserves, including 1700 tcf of natural gas (30% of world's total) and 60 billion barrels of oil (eighth largest reserves globally). Gazprom is the largest gas producer in the world, responsible for 20% of global production and 90% of Russia's. Production sharing agreements (PSAs) were used to protect foreign investors in Russia, providing tax exemptions and arbitration. However, PSAs faced political controversy over their terms and Russia's laws conflicting with investor rights. Shell considered further investing $10 billion in the Sakhalin II project due to assurances from the Russian government, but risks included political instability and tax disputes.

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    Journey To Sakhalin:: Royal Dutch/ Shell in Russia (A), (B) & (C)

    Uploaded by

    shahin selkar
    100 views10 pages
    Russia has vast oil and gas reserves, including 1700 tcf of natural gas (30% of world's total) and 60 billion barrels of oil (eighth largest reserves globally). Gazprom is the largest gas producer in the world, responsible for 20% of global production and 90% of Russia's. Production sharing agreements (PSAs) were used to protect foreign investors in Russia, providing tax exemptions and arbitration. However, PSAs faced political controversy over their terms and Russia's laws conflicting with investor rights. Shell considered further investing $10 billion in the Sakhalin II project due to assurances from the Russian government, but risks included political instability and tax disputes.

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    Group4_JourneyToSakhalin_12032020

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    Russia has vast oil and gas reserves, including 1700 tcf of natural gas (30% of world's total) and 60 billion barrels of oil (eighth largest reserves globally). Gazprom is the largest gas producer in the world, responsible for 20% of global production and 90% of Russia's. Production sharing agreements (PSAs) were used to protect foreign investors in Russia, providing tax exemptions and arbitration. However, PSAs faced political controversy over their terms and Russia's laws conflicting with investor rights. Shell considered further investing $10 billion in the Sakhalin II project due to assurances from the Russian government, but risks included political instability and tax disputes.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    100 views10 pages

    Journey To Sakhalin:: Royal Dutch/ Shell in Russia (A), (B) & (C)

    Uploaded by

    shahin selkar
    Russia has vast oil and gas reserves, including 1700 tcf of natural gas (30% of world's total) and 60 billion barrels of oil (eighth largest reserves globally). Gazprom is the largest gas producer in the world, responsible for 20% of global production and 90% of Russia's. Production sharing agreements (PSAs) were used to protect foreign investors in Russia, providing tax exemptions and arbitration. However, PSAs faced political controversy over their terms and Russia's laws conflicting with investor rights. Shell considered further investing $10 billion in the Sakhalin II project due to assurances from the Russian government, but risks included political instability and tax disputes.

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    Journey to Sakhalin:

    Royal Dutch/ Shell in Russia (A), (B) & (C)


    Group 4:
    Anand Kumar(2), Chirag Thakkar(11), Devansh Saxena(13), Raj Shah(32), Rohan Nandi(36),
    Shahin Selkar(40), Souvik Biswas(43), Vedant Dhakate(49).
    International Markets

    Oil Market Gas Market

    Group 4 • PGDM (IM) • 2019-21 • AIIM


    Russia in Oil & Gas Market
    ►1700 tcf of Proven Natural Gas Reserves
    » Constituting 30% of World’s Total Reserves (Also World’s Largest Concentrated
    Supply in any country)
    ►60 Billion bbl of Oil Proven Oil Reserves
    » Eight Largest concentration of Oil in World
    ►Dominant Oil Industry firms – Lukoil, Yukos, Surgutneftegaz, the Tiumen
    Oil Company (TNK), Sibneft, Slavneft & Rosneft (all vertically integrated)
    ►Gazprom was the largest gas-producing company in the World (20% of
    World and 90% of Russia’s Gas Production) in which Russian Govt. retained 38%
    stake.

    Group 4 • PGDM (IM) • 2019-21 • AIIM


    Role of PSA in protecting Foreign Investors
    ►Terms of PSA had Legal framework separate from the Russian Law
    ►Devised for Long term projects thereby long-term access to vast reserves
    ►Exemption from VAT & customs, road user’s and property taxes for PSA
    investors, contractors & many subcontractors
    ►100% cost recovery for PSA investors
    ►Title on project assets held by SEIC until full recovery has been achieved
    ►Post full-cost recovery title transferred to Russian Govt. but SEIC retains
    the right of exclusive use for as long as the company deems operations
    to be economic
    ►Fixed Profit tax rate
    ►PSA governed by law of New York with arbitration in Stockolm per
    UNCITRAL rules
    Group 4 • PGDM (IM) • 2019-21 • AIIM
    Russian Controversy over PSA (1/2)
    ►Politicization in Terms of PSA & sometimes agreement itself
    ►Lack of civil service infrastructure to implement terms of PSA
    ►Custom officers of island often challenged SEIC’s customs-free
    importation of project materials & other problems with Island Govt.
    ►VATRefund mechanism was not present
    ►Undefined “Russian Content” – Man-hours & Volume of materials (not
    ruble or dollar amounts)
    ►Constitutionalityof PSA challenged in Russian Parliament
    ►Bureaucracy – Constant Political developments in Russia & especially
    with Duma (Russia’s Supreme Legislative Body)

    Group 4 • PGDM (IM) • 2019-21 • AIIM


    Russian Controversy over PSA (2/2)
    ►Current & proposed laws directly conflicting Investor rights guaranteed
    in PSA
    » Anti-Monopoly law giving right to force 3rd party allocation into Oil & Gas facilities
    such as pipelines at Govt. determined tariffs vs. Arms-length price
    » Gas Supply Law allows Govt. to force a Private Gas pipeline company to sell gas to
    3rd parties at Govt. determined prices
    » Duma’s Draft Trunk Pipeline Law under consideration would bar foreign ownership
    of Oil & Gas export pipelines
    » Tax code’s passage of PSA chapter is necessary to clarify & anchor the means for
    reimbursement of VAT to the investor

    Group 4 • PGDM (IM) • 2019-21 • AIIM


    Gazprom & the Russian State
    ►In Gas – Gazprom, largest gas company in the world, wherein Russian
    Govt. retained 38% stake
    » It Constituted 20% of the World
    » 90% of Russia’s Gas production
    » Itself responsible for 8% of Russia’s GDP
    ►Close relationship of Govt. with Board led scholars to suggest:
    “The firm often acted as another policy lever for the president”
    ►Russian Natural Gas Law, 1999 provided:
    » Gazprom had to supply the Russian market, regardless of profitability, at regulated
    prices that were, at times, 1/10th of the world price
    » At times, it seemed Russian Govt. acted on behalf of Gazprom in its International
    dealings

    Group 4 • PGDM (IM) • 2019-21 • AIIM


    Investing Decision in Sakhalin II (1/2)

    • Shell would received indirect • Delay in TEOC approval


    Russian Govt. backing • Arbitrary $1 billion tax bill on
    presumably making its Yukos, Russia’s 2nd largest oil
    presence more secure company
    • Sakhalin II MOU seen as • Russian State Audit
    Natural extension of Russian Department investigated on
    Govt. influence in Industry charges of Financial
    (until then which was dominated by
    large foreign energy firms) damages (for not employing
    domestic workers)
    • “Strategically Important”
    agreement with Gazprom • Neokom gas field’s
    estimated offering over 3
    times than Sakhalin II
    • Investments > $8.5 billion

    Group 4 • PGDM (IM) • 2019-21 • AIIM


    Investing Decision in Sakhalin II (2/2)
    ►Yes,Shell should invest another $10 billion in Sakhalin II
    ►Why?
    » Letter of Assurance from P.M. of Russian Govt.
    » Necessary to build up Shell’s position in western Siberia
    » Already it has made investment in excess of $8.5 Billion on an estimated $10 Billion
    project cost
    » Shell looked forward to exploring new field and for this continuing existing project
    becomes quintessential
    » Asset Swap deal with Shell increases probability of production growth in Russia for
    both parties
    Risk Mitigation Plan
    » Lobbying for getting a written agreement to empower Letter of Assurance
    » Investments in other projects like Neokom, etc. to diversify risk
    » Lobbying for PSA based changes in Tax & Policy regimes
    » Robust planning for ascertaining Asset Swap deal with Gazprom comes through

    Group 4 • PGDM (IM) • 2019-21 • AIIM


    “I have seen Ceylon, and it is heaven, and now I have seen Sakhalin, and its is hell.”
    -Anton Chekhov

    Group 4 • PGDM (IM) • 2019-21 • AIIM

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