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Russia: Foreign Energy Investment Lagging In Ex-Soviet Region

Foreign oil companies' complaints about growing problems in Russia and Kazakhstan could cloud prospects for investment in the region. While both countries suffer from a lack of adequate legal protections, some companies are still willing to take the risks while others withdraw.

Boston, 27 November 2002 (RFE/RL) -- Problems for foreign oil investments across the former Soviet region have analysts searching for a common thread to explain what has gone wrong.

But events in Russia and Kazakhstan suggest a series of causes with some common elements rather than a single source of the troubles. Even so, the coincidence of timing could dim the investment outlook in the region, threatening prospects for foreign involvement in both countries at once.

On 24 November, "The New York Times" published a profile of the problems that oil giants have faced in Russia under the title "Why U.S. Oil Companies and Russian Resources Don't Mix." The article stood in contrast to the optimism of U.S. and Russian officials over an energy partnership announced earlier this year.

The report reads: "Though oil multinationals are accustomed to tough investment conditions, Russia's are particularly difficult. Opportunities for foreigners are few. Negotiations that last a few months elsewhere continue for years in Russia."

Foreign oil companies have complained particularly about the sluggish progress in getting legal guarantees known as production-sharing agreements, or PSAs, which are designed to protect projects from abrupt changes in tax laws that can turn years of work into a loss.

The Russian State Duma has been notoriously slow in passing PSA legislation. According to the newspaper report, big Russian oil companies like Yukos have also lobbied against PSAs to keep foreign competitors out.

But even for projects that have already won PSAs, the risks of working in Russia can present a perilous course. Last week, a Royal Dutch/Shell official warned that a $9 billion gas project on Sakhalin Island in Russia's Far East could be stopped unless the government acts to protect its PSA from overriding tariff and price regulation.

Reuters quoted Steve McVeigh, chief executive of the Sakhalin-2 consortium, as saying that, "Russian laws allow the government to fix pipeline rates or force us to sell at set prices." McVeigh added, "We cannot invest in something we have no control over."

In one sense, there is nothing new about the problems of foreign companies in Russia. The oil majors have never had an easy time with bureaucracy, political resistance, or local conditions since independence.

Julia Nanay, director of Petroleum Finance Company, a Washington-based consulting firm, told RFE/RL that the recovery of Russia's oil companies has also made them rich enough to do without foreign ventures. Nanay said, "It's the recent high oil prices and the cash accumulations of local elites that have made foreigners seem redundant."

At the same time, Russian companies have been promoting the energy partnership with the United States to establish a new market for their oil. Yesterday, Yukos joined LUKoil, Tyumen Oil Company, and Sibneft in announcing that they will build a new export terminal at the Arctic port of Murmansk to tap the U.S. market.

In Kazakhstan, foreign investors have reached their limit in negotiations over the giant Tengiz oil field. Earlier this month, the Tengizchevroil joint venture said it would shelve a $3 billion expansion unless Kazakhstan drops demands for more funding and contract revisions. Foreign partners in the country's mammoth Kashagan oil field are also reportedly considering a delay because of pressures from the government and a new investment law.

But the problems in Kazakhstan may differ from those in Russia because of the downturn of the investment environment in the country, particularly over the past two years. Unlike Russia, Kazakhstan threw open its doors to foreign oil companies in the early days of independence, attracting $13 billion in investment.

The mood has changed with Kazakhstan's attempts to revisit the terms of existing contracts and resentment over profits that investment may bring. Some reports suggest that a U.S. Justice Department probe of alleged bribery in Kazakhstan, disclosed in July 2000, marked the start of tougher times for foreign firms. The situation has also deteriorated badly for opposition figures and the press, which have suffered numerous cases of beatings and imprisonment.

The common element for foreign investment troubles in Kazakhstan and Russia seems to be a lack of adequate legal protections. The problem has even shown itself in the operations of a cross-border export pipeline between Kazakhstan and Russia, where officials from the Caspian Pipeline Consortium complained last week that Russia has tried to impose higher tariffs and taxes despite legal guarantees.

But there are also signs that seem to defy wider trends. In the past week, the U.S.-based Kerr-McGee Corporation reportedly negotiated the sale of its interests in Kazakhstan. The interested buyer is Royal Dutch/Shell, the same company that has warned about its Sakhalin Island investment in Russia. Shell officials are expected to meet with President Nursultan Nazarbaev when he visits the Netherlands this week, the AFX news service said.

According to "The Russian Energy" weekly, Kerr-McGee's shares in Kazakh oil fields and the Caspian Pipeline Consortium are only part of the attraction. Shell is said to be seeking a far larger role in Kazakhstan's Caspian resources. The newsletter said, "The company sends a signal that it is serious about investing in Kazakhstan and prepared to support declarations with real deeds."

Shell's bid for business in Kazakhstan comes as others are freezing their investments or withdrawing, even while Shell is struggling with its own investment in Russia's Far East. The move suggests that some foreign companies are still weighing and willing to compete for opportunities in the region, while others may find the difficulties too much to bear.