29-11-00 A wave of joint projects that would turn Britain into Russia's key oil and gas partner is building after Tony Blair's 20-hour visit to Moscow at the start. Days after Blair flew home, the Russian government ordered a quick resolution to problems with oil and gas production-sharing legislation, which has been mired since the Duma -- Russia's parliament -- passed a wholly inadequate law in 1996. BP and Shell have refused to invest in Russian exploration projects except via production-sharing agreements (PSAs), which should replace complex tax legislation with a simple division of crude output between the government and investors.
"The prime minister referred in his meeting with the Russian premier, Mikhail Kasyanov, to the importance of establishing a PSA framework that allows foreign companies to invest large amounts of money with confidence," said an official at the British embassy in Moscow.
The most promising joint project, contingent on the establishment of a good PSA regime, is a proposed $ 1 bn investment by Shell in development of the Zapolyarnoye gas field on the far-north Yamal peninsula, owned by Gazprom. Shell re-announced the plan after it was aborted at a first attempt three years ago.

With 10 tcm of natural gas at Zapolyarnoye and other sites, Yamal accounts for a third of all Gazprom reserves. Deposits owned by Gazprom, in turn, account for a third of global natural gas reserves. The key to success in Yamal is efficient transport to the European market, and Shell said earlier that it has entered talks with the Ukrainian government on pipeline transport.
"We have been discussing a way to manage the Ukrainian pipeline system, which would address concerns, and we have proposed that it would involve Gazprom," said Grant Bowie, head of Shell"s Moscow office. The main concerns are Ukraine's unpaid debt of over $ 1.4 bn for Russian gas supplies, and the unpaid siphoning by Ukraine of transit gas to Europe.
In separate developments, Shell has become the operator at the Sakhalin-2 offshore project in the Russian Far East, where the company increased its stake from 25 % to 62.5 % this summer after buying out the US major, Marathon. BP said at the end of October that it is discussing the purchase of a 20 % stake in the Sakhalin-1 project from the Russian state oil company, Rosneft.

Fields included in these two projects have modest estimated oil reserves of around 800 mm tons, but they also contain a significant gas component and Shell is discussing entry to further Sakhalin offshore developments. Shell and BP have been ready to work at Sakhalin-1 and Sakhalin-2, because both projects are PSA-governed under a decree by Boris Yeltsin in the mid-1990s. Since then, international oil companies have become bearish about Russia due to the continued tax jungle and unpredictable local partners.
"Companies were enthusiastic 10 years ago -- they saw huge available fields and oil prices fairly stable. Since then values have seen volatility and the rest of the world has opened up. The Russian government has not understood that," said Stephen O'Sullivan, head of research at Moscow investment bank UFG.
The main PSA moves by the government were a decision to appoint a single state oil company to sign PSAs (probably Rosneft) and giving responsibility for PSA law development to the Economic Development Ministry of the chief government liberal, German Gref. The minister needs to insert a section on PSAs into Russia's new tax code and overcome the legal requirement for Duma approval of any field development on PSA terms.