06MOSCOW11256, RUSSIA: E/CBA FRANK MERMOUD’S ENERGY DISCUSSIONS

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Reference ID Created Released Classification Origin
06MOSCOW11256 2006-10-06 09:55 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO1973
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #1256/01 2790955
ZNY CCCCC ZZH
P 060955Z OCT 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 3546
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 011256 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA 
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT/EKIMOFF/PISCITELLI 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 01/26/2016 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIA: E/CBA FRANK MERMOUD'S ENERGY DISCUSSIONS 
 
REF: MOSCOW 10984 
 
Classified By: Acting ECON M/C Laura Lochman.  Reasons 1.4 (b/d). 
 
1. (C) Summary: During his September 18-21 visit to Moscow, 
E/CBA Frank Mermoud's GOR and private sector interlocutors 
described continued GOR debate on new subsoil and strategic 
sectors legislation, growing displeasure with Production 
Sharing Agreements (PSAs) coupled with assurances that 
existing agreements will be honored, conflicting views on the 
need for additional foreign investment in the energy sector, 
and clear-eyed analyses by U.S. energy companies on the need 
for Kremlin support for their activities here.  Rosneft's 
Chief Financial Officer (CFO) Peter O'Brien was upbeat on 
Rosneft's cooperation with ExxonMobil on the Sakhalin-1 PSA, 
and did not expect Gazprom to use the same aggressive tactics 
to get into the project as it is using to get into Shell's 
Sakhalin-2 PSA.  End summary. 
 
Subsoil Law: Ongoing Debate 
--------------------------- 
 
2. (C) Chairman of the Duma's Committee on Natural Resources, 
Natalya Komarova, confirmed that the GOR is still reviewing 
the proposed new subsoil law, originally introduced to the 
Duma in mid-2005 and recalled by the GOR for improvements in 
November of last year.  Meanwhile, amendments to the current 
subsoil law are passing through the Duma.  Komarova observed 
that while the new subsoil law and the proposed strategic 
sectors laws, both of which will outline restrictions on 
foreign investment in the energy and other &strategic8 
sectors, are not temporally linked, their contents are 
logically being closely coordinated. 
 
3. (C) In response to Mermaid's observation that clear rules 
of the road are needed for investors, Komarova retorted that 
the current subsoil law is functional, and assured that any 
new legislation would preserve the sanctity of contracts 
negotiated under current legislation.  She added that 
Russia's energy sector was so large and attractive that the 
oil majors will not turn their back on Russia, regardless of 
any uncertainly surrounding new legislation. 
 
4. (C) Commenting on the proposed new subsoil law, Chairman 
of the Duma Committee on Energy, Transport and 
Communications, Valeriy Yazev, linked the decreasing 
thresholds under which oil and gas deposits would be 
considered &strategic8 (and therefore fall under foreign 
investment restrictions) to barriers to Russian investment in 
the EU,s downstream markets.  He also asserted that Russia's 
energy sector was attractive enough to domestic investors 
that there was no need for any special legislative regime 
aimed at attracting foreign companies. 
 
5. (C) Anatoliy Yanovskiy, Director of the Department of Fuel 
and Energy Complex, Ministry of Industry and Energy was not 
certain that the inter-agency consensus on the subsoil law 
will be reached before the end of this year.  Yanovskiy noted 
that the subsoil law will put in writing what would be 
considered "deposits of strategic importance."  He argued 
that this law will establish a clear and transparent basis 
for deposits in designated fields. 
 
6. (C) Meanwhile, U.S. energy majors and energy services 
companies told Mermoud that while they continue to hope for a 
new subsoil law with clear rules of engagement, they will 
still need to rely on support from a handful of people in the 
Kremlin to conclude deals and ensure their continuity.  One 
company told us that even under current legislation, they 
would be open to taking a 49% stake in collaboration with a 
Russian company to tap unexplored Western Siberia resources. 
 
 
PSAs: We Don't Like Them, but We'll Respect Them 
--------------------------------------------- --- 
 
7. (C) Duma Natural Resources Committee Chair Komarova 
welcomed foreign partners, investment and technology, 
particularly as relates to deep drilling.  However, she made 
no bones about her dislike of Production Sharing Agreement 
(PSA) legislation, under which several oil and gas projects 
on Sakhalin Island are being developed.  While she 
characterized PSAs as bad deals for Russia that are no longer 
 
MOSCOW 00011256  002 OF 003 
 
 
reflective of the current investment climate, she asserted 
that the terms of the current projects should be fully 
respected.  She also expressed concern about the recent 
aggressive inspections of the PSA projects by Russian 
oversight agencies reviewing compliance with environmental 
regulations, commenting that the agencies, status and 
competencies lacked clarity. 
 
8. (C) Duma Energy Committee Chair Yazev told Mermoud
that 
the PSA schemes were necessary to attract foreign investment 
in the turbulent 1990,s, but were no longer relevant. 
Russia does not need foreigners, capital or technology, he 
claimed.  What Russian companies need is equitable and 
reciprocal access to foreign energy markets.  Yazev did 
concede that as long as foreign companies currently 
developing Russian energy resources observed Russian law, 
they should be allowed to continue their work.  While he 
rejected foreign help in developing Russia's oil and gas 
reserves, he welcomed U.S. company assistance in 
manufacturing machinery for the sector. 
 
9. (C) Yanovskiy of the Ministry of Industry and Energy 
asserted that the integrity of the PSA contracts will be 
maintained, and that there was no attempt by the GOR to roll 
back, re-write or revoke the terms of the PSA agreements. 
That said, he noted that there was significant concern about 
the budget over-runs of Sakhalin-2, and argued that it was 
understandable that there would be a peer and partner review 
of the costs.  He downplayed the possibility of political 
considerations as being behind the review of Sakhalin-2. 
Yanovskiy said the Ministry was pleased with the progress of 
the project itself, with LNG-planned construction nearly 
complete as well as the north-south pipeline. 
 
Rosneft: Minding Its Domestic Business 
-------------------------------------- 
 
10. (C) Rosneft's CFO Peter O'Brien (please protect) reported 
that Rosneft worked closely and well with majority partner 
ExxonMobil on the Sakhalin-1 oil and gas PSA.  O'Brien was 
optimistic that the additional reserves recently discovered 
in the Chayvo field, not originally mapped out under the PSA 
but adjacent to it, would eventually end up with the PSA 
either through a GOR decision or Rosneft acquisition of the 
reserves via auction (Reftel).  He was not concerned that 
Gazprom would subject the Sakhalin-1 project to the same 
aggressive tactics employed vis-a-vis Shell's Sakhalin-2 PSA, 
since there were plenty of ways to "bring Gazprom in."  One 
of them could be to sell Sakhalin-1's gas to Gazprom just 
prior to exporting it so that Gazprom could maintain its 
export monopoly. 
 
11. (C) Regarding Rosneft's strategic plans, O'Brien said 
that the company is focused on its domestic operations and 
was not looking to launch serious overseas ventures at this 
time.  One reason is the asset valuation gap, by which 
Russian assets are discounted due to difficulties in getting 
the oil out of the ground, political risks, etc., and 
therefore undervalued vis-a-vis foreign assets.  Rosneft 
prefers to wait until the gap narrows or vanishes so it can 
negotiate on more favorable terms.  O'Brien stressed that 
Rosneft can narrow its own valuation gap by being more 
responsive to its shareholders and working in an open and 
transparent manner.  Domestically, Rosneft sees continued 
opportunities in Western Siberia, and fewer in East Siberia. 
Rosneft knows the Western Siberia fields well, and has no 
real need for Western partners. 
 
American Businesses Concerned about WTO 
--------------------------------------- 
 
12. (C) Representatives from leading American companies, 
including Boeing, Merck and Citigroup and AIG, as well as the 
president of the American Chamber of Commerce expressed 
concern that if a WTO bilateral agreement were not reached, 
there would be a negative spillover for their businesses in 
Russia. Failure to reach agreement, they argued, would be 
blamed, regardless of the actual situation, on the United 
States, and could trigger a backlash against American 
consumer products.  If an agreement on WTO were reached, 
these executives, already bullish on the Russian economy, 
said they would be even more sanguine about Russia's market 
potential for American consumer products and financial 
 
MOSCOW 00011256  003 OF 003 
 
 
services. 
 
12. (U) E/CBA Mermoud cleared this message. 
BURNS

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