Uzbekistan Doubles Gas Price.

Uzbekistan has nearly doubled the price of natural gas it sells to Kyrgyzstan from $55 to $100/000 CM. The new price, agreed upon at government talks in the Uzbek capital Tashkent on Dec. 13, will affect all of the other buyers of Uzbek gas including Gazprom.

Kyrgyz Deputy Prime Minister Daniyar Usenov said the two neighbouring countries also agreed that in 2007 Uzbekistan will provide Kyrgyzstan with 850 MCM (30 BCF) of natural gas. Kyrgyzstan, which relies entirely on imported gas, also buys it from neighbouring Kazakhstan.

Uzbekistan, the third-largest natural gas producer in the former Soviet Union, has repeatedly suspended energy supplies to impoverished Kyrgyzstan and another Central Asian neighbour, Tajikistan, following political differences and over alleged debts.

UzTransGaz, a division of the state-owned UzbekNefteGaz (UNG), in October announced plans to increase natural gas prices for Russia and Central Asian countries and said the raise was due to "increased prices for extraction, processing and transportation". In mid-2005, Uzbekistan cut off gas supplies to Kyrgyzstan's southern regions without explanation, a move Kyrgyz officials dismissed as retaliation for Kyrgyzstan allowing the UN to evacuate hundreds of Uzbek refugees from its territory. The refugees fled a bloody crackdown on an uprising in eastern Uzbekistan (see survey in this volume Nos 15-17 and gmt17UzbGasExprt-Oct23-06).

Sakhalin Energy Has Problems With Moscow; Shell Denies Upping Costs: Reuters on Dec. 15 quoted a Shell spokesman as denying that the major had again increased costs of its Sakhalin-II oil and gas venture as such a move would further complicate talks on including Gazprom in the project. The previous costs revision to $22 bn from $12 bn at Sakhalin in 2005 infuriated the state gas monopoly, which was then prepared to buy 25% in the venture, and prompted a flurry of investigations by Russian authorities. As pressure from officials began to threaten the project's start-up date for supplying LNG to customers in Asia and the US from mid-2008, Shell this month offered Gazprom control in the venture.

On Dec. 14, The Times newspaper quoted sources close to the Shell-led group as saying overall costs had moved closer to $25 bn. But Reuters quoted Shell's Moscow spokesman Maxim Shub as saying: "We deny this news. Our cost estimates have not changed". Moscow, which has yet to approve the first spending increase, claims that any cost overrun would delay the moment when the country starts getting it share of profits in the production-sharing agreement (PSA) with the Shell-led group - called Sakhalin Energy. But Reuters on Dec. 15 quoted analysts as saying that Russia's anger over the higher costs had served as a cover to enable the Kremlin to press for greater control over the country's energy wealth and limit foreign involvement in strategic industries.

Reuters quoted "sources" as saying Shell was ready to sell 30% of its 55% stake in Sakhalin Energy to Gazprom, while the JV's Japanese partners Mitsui & Co. and Mitsubishi Corp. may reduce their stakes by 10% - to 15% for Mitsui and 10% for Mitsubishi. But sources said Shell still wanted to remain the project's operator despite having a smaller stake than Gazprom, partly because the Russian giant has no experience in LNG despite being the world's largest gas producer. Russian newswires also reported last week that Gazprom may request to pay for its stake in Sakhalin from the project's cash-flows after the start of commercial production, over 20 months from now.

Reuters quoted a "source close to Shell" as saying: "No decision has yet been taken as to how and when Gazprom will pay for its stake". Analysts' estimates for half of Sakhalin-II have ranged from $4 bn to $10 bn. Analysts say that Shell would lose a lot if Gazprom managed to structure the deal in such a way that it would pay for its stake with income from LNG production.

In a note Alfa-Bank said: "The irony of the situation is that we expect that the purchase price will be set close to the operator's historical costs and that the historical costs under the PSA...were supposed to be recovered anyway. This means that, if the deal takes place as described, it would de facto change the terms of the PSA for the previous operators", adding that such as deal would further damage investor sentiment towards Russia. Deutsche UFG brokerage said it believed Gazprom's benefits from the project would be limited.

The Russian Natural Resources Ministry has mounted a campaign of inspections by environmental agency RosPrirodNadzor and threats of administrative sanctions against Sakhalin-II, the only big Russian energy project entirely in foreign hands. Partly as a result, a deal is taking shape for Gazprom to buy into the venture which includes the world's biggest LNG project, due to start supplies to Japan, South Korea and the US in mid-2008. Igor Ignatyev, vice president of Sakhalin Energy, on Dec. 13 told reporters: "The activity of the regulatory bodies who are slowing down the process of getting an agreement is beginning to have an effect on the project. In January we are due to start drilling at the Lunksoye field, but for more than two months we haven't been able to get RosPrirodNadzor to send its agreement for the start of drilling. The [Lunskoye] timetable is no longer realistic. It will be a serious factor in keeping to project deadlines". Russia's water resources agency has suspended 12 water-use licences held by Sakhalin-II's main contractor - Russian-Italian joint venture Starstroi - and given it two months to put the violations right. On Dec. 13, Interfax news agency quoted the agency's head Rustam Khamitov as saying he doubted the contractor could rectify the violations and the licences would be suspended. This would prevent the group from finishing pipelines linking gas fields in the north of Sakhalin island with the liquefaction plant in the south.

Pressure from RosPrirodNadzor official Oleg Mitvol is part of a wider drive to increase Kremlin control over Russia's strategic energy sector. Ignatyev said: "Everybody is speaking about the company's activities, but nobody raises questions about the personal responsibility of officials in this project, which is very serious and strategic for Russia".