Royal Dutch Shell's trouble with Russia

Royal Dutch shell has run into a spot of bother with the Russians. The situation demonstrates the problems of working with governments who tend to make up the rules as they go along, to suit their own ambitions.

BP has been coming under fire a great deal recently.

Its troubles in the US, ranging from last year's fatal fire at its Texas refinery, to the current problems with corrosion in the Prudhoe Bay pipeline have been widely covered. Many commentators are now suggesting that the once much-lauded chief executive Lord Browne should step down earlier than the Christmas 2008 deadline he's been given.

But at least BP's problems are occuring in a country with sound respect for the rule of law. Royal Dutch Shell is having less-widely reported troubles in a much more hostile environment.

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Royal Dutch Shell has run into a spot of bother with the Russians. The country's environmental inspectorate has filed a lawsuit that could stop the company's $20bn natural gas project on the island of Sakhalin.

The company has already seen costs double on the project, which is the largest integrated oil and natural gas scheme in the world. The Sakhalin 2 development, once complete, would have the capacity to meet 8% of the world's liquefied natural gas demand. Shell is the majority stakeholder in the Sakhalin Energy consortium, which also includes subsidiaries of Japan's Mitsui and Mitsubishi corporations.

But now the Russian authorities are seeking to repeal a 2003 feasibility study that allowed the plan to go ahead in the first place.

As London's Evening Standard points out: 'The move comes just four months after Kremlin officials demanded that foreign companies hand over more control of their ventures in Russia.'

And Russian gas giant Gazprom has been in talks for over a year to take a stake in the project. It doesn't take a genius to figure out which firm might stand to benefit if Shell's rights to the project were repealed.

Gazprom originally agreed to take a 25% stake in the project, in exchange for giving Shell a 50% interest in Gazproms Zapolyarnoye gas field in north Russia. But since Shell announced the surge in project costs last year, Gazprom has been trying to negotiate more favourable terms.

"The message is fairly clear," Chris Weafer at Moscow's Alfa Bank told Market Watch. "The state wants to restructure Sakhalin 2. They've tried the carrot, and now they are trying the stick."

The deal demonstrates more than ever the problems of being forced to work with governments that have a tendency to make the rules up as they go along, and to suit their own needs and ambitions. That's why it's more important than ever that the West finds sources of oil that don't involve relying on such countries.

We recently ran a cover story on the form that some of these sources could take - subscribers can read the piece online here: The future of oil - and how to profit from it (/file/17441/the-future-of-oil---and-how-to-profit-from-it.html)

If you're not a subscriber yet, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek. (/file/194/subscribe-from-not-logged-in.html)

Turning to the stock markets...

The FTSE 100 fell 4 points to 5,981. Centrica was the main riser, up 3% to 311p on continued speculation of a bid from Gazprom. For a full market report, see: London market close (/file/17843/london-close-footsie-closes-slightly-lower.html)

Over in continental Europe, the Paris Cac-40 closed 30 points lower at 5,172. The German Dax-30 fell 25 points to 5,884.

Across the Atlantic, US stocks made gains. Heavy equipment maker Caterpillar was among the main risers as it said it would raise its prices next year. The Dow Jones Industrial Average rose 5 points to close at 11,469, while the S&P 500 gained 2 points to 1,313. The tech-heavy Nasdaq rose 12 to 2,205.

Over in Asia, the Nikkei 225 fell 101 points to 16,284, with banks leading the way as broker Goldman Sachs cut its recommendations on the sector.

Oil prices were lower in New York this morning, with crude trading at around $68.50 a barrel. Brent crude was also down, trading at around $67.35.

Meanwhile, spot gold was higher, trading at around $639 an ounce as consumer interest picks up in India ahead of the October wedding season. Silver was also ahead, trading at around $12.89 an ounce.

And in the UK this morning, tobacco group Gallaher saw half-year profits rise 4% in the first six months of the year, to £275m, despite tough European markets.

And our two recommended articles for today...

How the US property slowdown will affect interest rates

- If you need proof that that US economy is slowing down, look no further than the US residential property market, says Charles Stanley's Jeremy Batstone. What will this mean for the Fed's next interest rate decision? To find out, read: How the US property slowdown will affect interest rates


Why Iceland is hot for commodities investors

- Aluminium producers are flooding to Iceland, says Dr Steve Sjuggerud in the Daily Wealth newsletter. To find out why this could be good news for the metal's price, read: Why Iceland is hot for commodities investors (/file/17847/iceland-is-hot-for-commodities-investors.html)

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.