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The Far East and the West:
What will sanctions lead to?
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 recall 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 their new raw materials. For its part, Western business, in need of new “platforms”, was eagerly interested in Russian projects and the conditions for their implementation. One of the key projects turned out to be at that stage and the Sakhalin shelf still remains. At the same time, Russia initially agreed to use the product 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 draining resources. It is noteworthy that the coordination of interests of the Russian side and Western counterparties was delayed for many years, during which some foreign companies finally refused to work on Sakhalin. Actually 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.
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).
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.
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.
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 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.
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 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.