Russian External Investments - The Kremlin/Gazprom View.

At the G8 summit in St Petersburg on July 15-17, President Vladimir Putin and his aides made it clear to the participating industrial powers that the role of Russia as the world's No. 1 energy supplier could only be enhanced and become more committed to the needs of consumer nations if the latter facilitated access to these markets for Russian companies. Putin was particularly keen on Kremlin-controlled firms - mainly Gazprom and Rosneft - buying lucrative assets in these markets, with emphasis on the EU, the US and the Far East.

Putin on May 25 had warned the EU it would have to give Gazprom the chance to buy into gas distribution networks in Europe if it wanted Moscow to give up its monopoly on gas export pipelines. Putin's comments came at the end of a day's summit meeting with the EU clouded by the latter's concerns about Russia's reliability as energy supplier and Moscow's persistent bid for European retail gas assets. He told a news conference: "If our European partners expect that we will let them into the inner sanctum of our economy - the energy sector - and let them in as they would like to be admitted, then we expect reciprocal steps in the most crucial and important areas for our development. If our partners expect something exclusive, the access to our production and transportation assets, we have a question about what we get in return", adding that the EU could not offer equal assets. He said: "Then they should find some other adequate compensation. The most important thing is that we have a desire to agree on this issue, and we will reach an agreement".

The energy disputes had hung over the relationship since early January, when a brief disruption in Russian gas supplies to West Europe amid a price dispute with Ukraine tarnished Russia's reputation as a reliable supplier and encouraged the EU to intensify a search for alternative supply routes. Austrian Chancellor Wolfgang Schussel, whose country then held the EU presidency, said: "We are as interested as Russia to avoid further misunderstandings". European Commission President Jose Manuel Barroso said there were still "sensitivities" to be addressed, adding: "This is not at all, I want to underline this on our side, a problem of lack of trust in Russia as a credible supplier, as Russia has always been. But there are some sensitivities, it is true". Barroso said touchy issues included the way public opinion in the EU reacted to the problems between Russia and Ukraine in early 2006.

The New Year's shutdown, followed by gas shortages amid a harsh winter, came as Russia declared energy security to be a top priority of its G8 chairmanship this year. Putin has since tried to assure his EU partners that China was no substitute for Europe as a market for Russia's oil and gas - although Russia was developing eastern markets for its energy resources. European fears of excessive energy reliance on Russia, which supplies 26% of Europe's gas and is its second-biggest supplier of oil, increased further amid talk that Gazprom was considering acquiring Britain's largest gas distributor, Centrica, and negotiating similar deals in other EU nations.

Russia's Ministry of Natural Resources on May 25 cited a report by Russia's Academy of Natural Science on the country's three production sharing agreements (PSAs), Shell's Sakhalin-2, ExxonMobil's Sakhalin-1 and the Kharyaga licence held by Total. It found them to be behind schedule, over budget and short on Russian involvement. The ministry said: "The academy suggests boosting the presence of Russian companies in these consortia to 51% as one of the measures to boost efficiency of these PSAs. The Russian Environmental Agency and the Natural Resources Ministry plan to use the academy's information in future application of control over developing these deposits". It said the academy planned to write to other government departments and ministries "to correct the situation".

Under Russian law, PSAs cannot be revised after being approved by the government and parliament. The ministry did not explain how it might remedy the failings identified by the academy. The three PSAs are exceptional examples of foreign-owned Russian projects. Russian state firms insist on having at least 51% of all major projects.