Russia threatens to rescind foreign oil company production rights

Sep 18, 2006, 19:24 GMT

Moscow - Russia may withdraw oil exploration rights from Royal Dutch Shell, Exxon Mobil and Total for non-fulfillment of production agreements, a state official said in Moscow Monday.

Failure to observe investment plans threatened operations by France's Total at the Kharyaga oil field in Western Siberia, according to the head of the legal rights department of the Ministry for Natural Resources, Sergei Fyodorov.

The two other companies could similarly lose their rights to work oil and gas deposits off the far eastern island of Sakhalin, he added.

In what may be the first step in rescinding entitlements, the ministry deemed invalid environmental permission that was granted to Royal Dutch Shell for a 20-billion-US-dollar project off Sakhalin.

The ministry cited infringements in the construction of an overland pipeline in the decision, which followed a ruling at the weekend by the state prosecutor's office that Shell had contravened federal law.

Russian commentators speculated that the semi-state-owned gas company Gazprom may have had a hand in the developments. Gazprom has been enlarging its oil branch with the goal of becoming Russia's largest producer.

The removal of foreign operators would also fit the pattern of shifting energy resources back into state hands. This is sanctioned by the Kremlin, which granted overly favourable product sharing agreements to foreign oil companies in the 1990s to generate funds.

Production contracts state that the company only pays taxes when revenues exceed investment. The Russian government claims that foreign companies have inflated levels of investment, thereby depriving the state of ten billion dollars in taxes.