Fings Break in Russia, Don’t They?

. Shell May Cede Control of Project To Russia’s Gazprom

The “project” to which that headline in today’s Wall Street Journal refers is the Sakhalin-2, part of a 4.5 billion barrel-equivalent sub-Arctic oil and gas development off the coast of the former Soviet Union.

Sakhalin is a large island: look it up on a map and you will see it actually appears to be an extension of the islands which constitute Japan.

And that’s exactly how Japan thought of Sakhalin, too, until the Russians—pay attention here, I am making a point—forced out the Japanese at gunpoint after invading the island on August 11, 1945. Sharp-eyed readers will recognize that date as coming the week after Hiroshima and Nagasaki had been obliterated by atomic bombs.That Joe Stalin really knew how to hurt a guy when he was down!

And so, it seems, does Vladimir Putin, today’s Strong Man at the Kremlin, who appears to have successfully muscled his country’s way into majority ownership of a major LNG project now that Shell has done much of the heavy lifting.

Readers may recall that Royal Dutch Shell could certainly use its 55% stake in Sakhalin-2 to replenish so-called “proved” reserves that became distinctly unproven several years ago after it was discovered Shell’s engineers had been using Fannie-Mae-like juggling of its oil and gas reserves. Which is to say, Royal Dutch’s bookkeepers were making them up.

Smelling desperation, Putin’s men cleverly used a cost overrun for the Sakhalin-2 project as a device to muscle Shell out.Like all good citizens with their backs to the wall in a dark alley and no recourse to either a gun or a passing officer, Shell is putting a very good face on the situation: Shell has proposed ceding a controlling stake in the Sakhalin-2 project in Russia’s far east to state-run OAO Gazprom, an official close to the situation said. Another person close to the talks stressed they are continuing and an agreement hasn’t been reached. Such a move would underscore the Kremlin’s opposition to foreign control of large energy projects in Russia at a time when an increasingly confident Russian state, buoyed by high oil prices, is determined to restore its domination of the country’s oil and natural-gas industry. So this is what it’s come to in a country with the largest untapped reserves of energy in the world: muckraking journalists get shot, anti-Putin KGB veterans get poisoned, and major oil companies like Royal Dutch Shell get squeezed out of large energy projects in the manner of the old Monty Python “Army Protection Racket” bit, in which Luigi and Dino Vercotti pay a visit to a starchy old colonel:

Dino: ‘Ow many tanks you got, colonel?

Colonel: About five hundred altogether. Luigi: Five hundred! Hey!

Dino: You ought to be careful, colonel.

Colonel: We are careful, extremely careful.

Dino: ‘Cos fings break, don’t they?

Cononel: Break?

Luigi: Well, everything breaks, dunnit colonel?

Fings are breaking in Russia too.

Jeff Matthews I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.