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The Far East and the West:

What will sanctions lead to?

The Far East and the West:

The deterioration of relations between Russia and the West this year, caused by our country's policy in Ukraine and the annexation of Crimea, is of great importance for the Russian Far East, even if the events that have caused sanctions occur at the other end of the country.

The orientation of the Russian economy towards Asia-Pacific countries and, above all, towards China, with which, recently, during V. Putin’s visit to Shanghai, new large-scale agreements were signed, is clearly increasing. This reorientation coincides with the development of new projects for the socio-economic development of the Far East and the creation of a management model in which the key positions are occupied by the Ministry for the Development of the Far East and Vice-Premier Yury Trutnev oversees it. At the same time, it is obvious that there can be no easy or complete reorientation of Russia to the East, and the sanctions regime will still somehow affect the Far Eastern situation, not forgetting at least that simple geopolitical fact that the United States and Canada are also countries ATP. Many Far Eastern projects so far have relied precisely on European and North American investments, and their fate in connection with the sanctions regime may be in limbo.

First of all, it is necessary to remember how the “West” appeared in the Russian Far East, i.e. business of western origin. After the collapse of the USSR, Russia actively demonstrated its readiness to attract Western companies to develop its new raw materials. For its part, Western business, in need of new "sites", was willingly interested in Russian projects and the conditions for their implementation. One of the key projects turned out to be at that stage and remains to this day the Sakhalin shelf. At the same time, Russia initially agreed to use the mechanism of production sharing agreements (PSA), which is not very pleasant for it, which is most often used in the third world countries and is essentially a colonial practice of siphoning resources. It is noteworthy that the coordination of the interests of the Russian side and Western counterparties dragged on for many years, during which some foreign companies finally refused to work on Sakhalin. Actually, the active implementation of projects began relatively recently.

Gold mining was another relatively open and interesting for Western capital sector of the Far Eastern economy. Here Russia was ready to attract investors for the development of various or many undeveloped fields, and the industry itself is characterized by enormous fragmentation with many fields and players, as well as strong positions of Western countries and companies. But not so much recoupment of projects, difficult conditions of field development led to a big “routine” when Western companies came and left, took control of the field and then abandoned them. Stable, progressive process of development of Russian gold deposits by Western companies did not work.

Western companies are now in a quandary. The authorities of their states do not demand to curtail work in Russia, but the most severe economic sanctions against Russia have not yet been adopted. In any case, Russia becomes for them a territory of increased investment risks, and Western business is forced to closely monitor the political situation and constantly assess the feasibility of working in our country. In addition, the sanctions affected at the personal level important counterparties of Western capital, primarily Igor Sechin, which leads to the complication of communications with his participation. Although Rosneft is not directly subject to sanctions, the prospects for strategically important projects in the Far East are very strongly linked to its activities and its relations with the West.

On the American side, the most important player in the Far East is such a global giant as ExxonMobil. Together with Rosneft, it actually manages the Sakhalin-1 project, where the Americans own 30% and Rosneft the 20% (another 30% is controlled by the Japanese company SODECO, 20% by the Indian ONGC). The Sakhalin-1 project is considered to be the largest oil and gas project in Russia in terms of foreign investment. The PSA for it was signed in the distant 1996 year, but the real work began much later. Nevertheless, the project is already working in full force and has quite good, although for several reasons (not related to sanctions) ambiguous prospects. As Exxon Mobil states on its official website, this project has given the Russian budget system 3,8 billions of dollars, incl. 1,3 billion dollars - in the budget of the Sakhalin region. In addition to oil exports, Sakhalin-1 provides gasification to the Khabarovsk Territory, directing natural gas to a pipeline stretched from Sakhalin to Primorye.

In addition, the Americans are quite active in financing infrastructure and social projects in Sakhalin and the Khabarovsk Territory. So, according to them, investments in infrastructure amounted to more than 220 million dollars. Recently, cooperation with the Sakhalin State University has been confirmed, and this is only one of a number of socially significant projects of the company.

Now Sakhalin-1 is the largest oil project of Sakhalin and the second largest gas project. The problems and prospects of this project are related to its further expansion, which can be complicated in connection with the sanctions and the uncertain position of the American side. In May, there were reports of the possible sale of Exxon Mobil's stake in the project, but then they were refuted, including. himself I. Sechin, who, obviously, is not interested in such a turn of events. Meanwhile, the previously commissioned Chayvo and Odoptu fields have already reached peak production levels. After 2008-09 years. there was a slight decline in oil and gas production (2013 million tons of oil and 7 billion cubic meters of gas were produced in 9,9).

In this regard, Sakhalin-1 is extremely important confidence in the prospects of the project from its co-owners. 2014 will be the year of the beginning of the second phase of the project due to the upcoming launch of the third and last Arkutun-Dagi oil field, as well as the expansion of gas production to Chayvo. Of particular importance is the construction of a plant for the production of liquefied natural gas in the framework of the Far Eastern LNG project. It was assumed that the first stage of the plant, under which the site has already been selected on Sakhalin, will start operating from 2018, producing about 5 million tons of LNG per year. But the project implementation is complicated by frictions with Gazprom, which is promoting its projects - expansion of production at the existing plant within the Sakhalin-2 project (see below) and the construction of a new plant in Primorsky Krai. As a result, today it is not clear whether the Far Eastern LNG project will be implemented at all, despite all the lobbyist efforts of I. Sechin.

Another interest of Exxon Mobil to work in Russia and cooperation with Rosneft arose as the implementation of the agreement on strategic cooperation of the parties signed in 2011. In February 2013, a new project appeared - two companies intend to participate in the exploration of seven Arctic sites, three of which are located on the shelf of the Chukchi Sea - North-Wrangel-1, North-Wrangel-2 and South Chukchi.

In a changing environment, the question becomes how much Exxon Mobil is interested in working in Russia. According to experts, the share of oil and gas produced in Russia, taking into account the share of Exxon Mobil in projects, is less than 3% of all its oil and gas production. Obviously, the company has many projects in various countries around the world. The Arctic sites in this regard are becoming the most problematic, because they have not even been explored, and can remain without investments. Perhaps, the prospect of "Far Eastern LNG" is of critical importance now, since it is the work in the market of liquefied natural gas that is now attracted by the world's leading companies. But here the Sakhalin-1 project is vulnerable. It is possible to develop the same existing fields and sell their oil for export, however, these are not so large amounts (with possible growth due to Arkutun-Dagi and yet a decline in the long term). In this regard, it is possible that the issue of leaving the Americans from the project, taking into account not only geopolitical, but also financial and economic problems, will rise again and again.

In fact, more closely involved in the Far Eastern oil and gas projects are now companies of European origin. It is worth recalling that the British BP is a major shareholder of Rosneft with its 19,75% of shares and, undoubtedly, is interested in the successful development of the company. Perhaps, a bunch of Rosneft and BP can contribute to attempts to mitigate the sanctions regime. It should be noted that BP's experience in Sakhalin was not successful: Rosneft and the British worked together on Sakhalin-4 and Sakhalin-5 projects, signed an agreement in 2006 to work together in fields, but in 2009 this work was suspended due to the uncertainty of prospects and financial benefits. In the new conditions, BP, as a shareholder, is interested in promoting all possible projects of Rosneft, considering that the sale of the stake is unlikely to be profitable from a financial point of view.

For new offshore projects, Rosneft, meanwhile, has found another European partner, represented by the Norwegian company Statoil. It is important to note that this company is state-owned, and therefore depends heavily on the position of the Norwegian government. Norwegians received 33,33% in completely new offshore projects located in the Sea of ​​Okhotsk, but closer to the shores of the Magadan Region. These are Magadan-1, Kashevarovsky and Lisyan sites. Behind these sites is an important prospect of expanding the shelf oil production, as well as more intensive development of the Magadan region as their coastal base. However, before the start of production, it is still very far away, it is necessary to engage in geological exploration, and in case of a positive decision on extraction, infrastructure development. From this point of view, Magadan, of course, is much more difficult and expensive than Sakhalin, which Western partners call one of the most complex projects in the world and even consider it "Arctic." Statoil has an interest in Russia, but gradually turns into a global player, opens up new countries for itself, and Russia is not its only priority. Like any Western company, it can switch to Latin American, African and any other projects, and the company has not yet mastered everything in its native Norway.

Thus, the system of relations with Western partners that has developed around Rosneft looks fragile enough. Existing projects do not have such a level of attractiveness that would cover political risks. It is no coincidence that I. Sechin demonstrates immense activity, trying to resolve the issue at least on the Far Eastern LNG, which actually opens up the immediate prospects for relations with the West.

In a more relaxed position, the Sakhalin-2 project is in the meantime, where the main western player is the Anglo-Dutch company Royal Dutch Shell (the project includes the Piltun-Astokhskoye and Lunskoye fields, as well as a liquefied natural gas plant). The PSA for this project was concluded the very first, as far back as 1994, and the first oil was mined in 1999. Since then, the project operator, Sakhalin Energy is one of the main players in the Sakhalin Energy Complex. But in the structure of control over the project, important changes occurred when Sakhalin-2 was under administrative pressure, and then Gazprom took over as the controlling shareholder from 2007. Shell's share was reduced to 27,5% minus one share, but despite this obvious trouble, the company remained an interested player (smaller groups are Japanese Mitsui and Mitsubishi groups). The long-term outlook for the project arose from the launch of Russia's first LNG plant, which began operating with 2009. In 2013, the plant produced 10,8 million tons of LNG, and its share in the world market is estimated at 4,5% (the main market is Japan, a significant part of LNG is also going to South Korea). In addition, within the framework of the Sakhalin-2 project, 2013 million tons of oil were produced in the same year as 5,4, and, in addition to liquefying gas, part of it was sent for gasification of the Sakhalin Oblast and Primorsky Krai.

In the last months of the crisis of Russian-Western relations, Shell has been showing an active interest in working in Russia. In April, Ben van Berden, CEO of the company, met with Vladimir Putin, which speaks for itself. Shell’s main interest is determined by the prospect of expanding LNG production. In February, Ben van Burden and A. Miller signed a roadmap, which involves the development of documentation for the preliminary design of the third LNG production line, for another 5 million tons per year. In fact, V. Putin supported the company's plans at a meeting with Shell management, which, on the other hand, put Rosneft and Exxon Mobil in a difficult position. Of course, with the existing experience, Sakhalin Energy is easier to prove the feasibility of its projects than it successfully uses. The Russian side in the project is Gazprom, which has its traditional frictions with its European partners, but which does not fall under sanctions either at the corporate or at the personal level.

At the same time, if the Sakhalin-2 project has already gained strength and inertia, then for the new projects the search for Western partners becomes even more difficult. Without any sanctions, for example, Gazprom was forced to independently start work on the Sakhalin-3 project, launching the Kirinskoye field in 2013. In 1993, the competition for the PSA for Sakhalin-3 was won by an American consortium consisting of Exxon, Mobil (then not yet merged into one company) and Texaco, but that project failed, and the development of Sakhalin-3 dragged on for years to come .

In general, Western sanctions represent the greatest risk for the fastest growing region of the Far East - Sakhalin. The same region is the largest recipient of direct foreign investments in the Far East, whose volume in 2012 amounted to 825,6 million dollars. For comparison: in the Amur region this indicator was at the level of 559,3 million dollars, in the Primorsky Territory - 400,8 million. In other regions, foreign direct investment is much less - 126,7 million dollars in the Khabarovsk Territory, 113,1 in Yakutia, 78,8 in Magadan Region, 48,9 in Chukotka, 17,9 in the Jewish Autonomous Region and only 2,1 in Kamchatka. Investments come from different countries, but Western ones form an essential part of them.

In connection with the sanctions, difficulties may also arise in Chukotka, where Canadian company Kinross Gold occupies important positions in gold mining. For Russia, this company is now the main Canadian investor and at the same time the main foreign investor in the field of gold mining.

The arrival of Kinross Gold in Chukotka made it possible in 2008 to dramatically increase production in this region due to the launch of the Kupol field. With 2013, mining began at Dvoinoye. Thus, Canadians are now exploiting two of the five ore gold deposits being developed in Chukotka. They are quite interested in Russia, which is shown by the frequent contacts of the parties, including the recent talks with the authorities of Chukotka and the optimistic performance of the company's executive director P. Rollinson at the recent international economic forum in St. Petersburg. At the same time, the Canadian government takes a tough stance towards Russia, which puts Kinross Gold in a difficult position, but does not cancel its plans for the time being.

At the same time, it is not necessary to talk about Kinross Gold's high financial and economic interest in Russia, nor about the company's long-term prospects for its current fields. The company provides a rapid increase in production and produces deposits as quickly as possible. On the Dome in 2008-10. 45% of the active reserves of the deposit were worked out, and it will close in 2020. To compensate for the decline in gold content in the ore produced at the Dome, production at the smaller one, the Double Field, which is designed for eight years of operation, began at 2013. At this stage, these are the leading operating projects for gold mining in Chukotka, but this situation is temporary. At the same time Kinross Gold works in other countries - in the USA, Chile, Brazil, Ghana, Mauritania. Russian deposits are among its smallest, yielding to the rest by proven reserves. They do not go into any comparison, for example, with the project Kinross Gold in Brazil, which accounts for the largest share of the company's reserves.

It is also worth recalling that other western gold mining companies periodically came to Russia, but their interest quickly faded. In fact, Kinross Gold remained the last, which is still actively engaged in our country.

However, in connection with sanctions, Western governments can exert pressure on companies of Russian origin who are registered abroad and are engaged in the extraction of precious metals. In particular, in the UK, the company Petropavlovsk is based, which is active in the Amur region, being one of the main economic players and investors there. Now the company diversifies its activities and, in addition to gold, begins to deal with iron ore, implementing the project of Kimkano-Sutarsky GOK in the Jewish Autonomous Region. In the United Kingdom offshore territories, the largest gold and silver mining companies of Russia, Polyus Gold and Polymetal, are registered on Jersey Island, with which, for example, the prospects for economic growth of the Magadan region are linked. In the Netherlands, Nordgold is formally based on Severstal's gold mining assets, which, incidentally, is international in character, owning assets in various countries.

Personal sanctions against Russian businessmen and their companies do not, however, have such a strong influence on the economic situation in the Far East. G. Timchenko personally and his company Sakhatrans, whose main asset is located in the Khabarovsk Territory, fell under the sanctions. This is a coal terminal under construction in the Vanino area, which is scheduled to be completed in 2016. It is assumed that its capacity will be 10 million tons per year with the prospect of increasing to 27 million tons. In particular, it can be used for the export of coal produced in Yakutia by the Kolmar company, also controlled by G. Timchenko. Sanctions, however, will not affect the completion of the port, and it is planned to export coal clearly not to the West. Therefore, this problem is quite avoidable. There are no other examples of getting into the sanctions lists of companies specializing in the Far East.

In general, the sanctions of the West do not exert a critical influence on the Far East, but can negatively affect certain important projects. First of all, these are oil and gas projects of Sakhalin and gold mining projects in Chukotka. It is quite possible to redistribute the interests of Western business in favor of other countries in the world (which will be relatively painless for him) and the sale of Russian assets. Perhaps the most "protected" is the Sakhalin-2 project, in which Shell participates as a junior partner, while Exxon Mobil's prospects for working in Russia have become more vague, and Kinross Gold can not be called a genuinely strategic investor at all.

In any case, we can expect an increase in the activity of Asian partners in Russia, especially Chinese, who are ready to occupy the vacated niches. The change of priorities is clearly evidenced by the behavior of G.Timchenko, who not only became a co-chairman of the Russian-Chinese business council on the Russian side. In May, his company entered into an agreement with the Chinese company China Harbor Engineering Co., which will result in the inclusion of Kolmar and Sakhatrans in a joint Russian-Chinese venture. Thus, the business of G.Timchenko, who is under the sanctions, will not work with the West, switching entirely to China. Rosneft, however, despite the growing importance of oil supplies to China, is much more closely involved in Russian-Western relations, and their normalization is of great importance to it. It can also be expected that the orientation of Far Eastern projects to the East Asian markets will gradually lead to the expansion of participation in these projects of companies from the respective countries - China, Japan, South Korea. Western countries do not have such importance for Far Eastern exports, which can also lead to a decrease in the interest of their companies.

Thus, political events do not so much determine the course of events in the Far East, as they push their development along the lines that have already become apparent. Under these conditions, it is important for Russia to compensate for possible losses or to prevent the freezing of projects related to the position of Western contractors. Critical is the problem search for markets in Asia: they have their own competition, on which the implementation of Far Eastern projects depends. 

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