Frozen Assets

Drilling for oil and gas around the harsh, remote island of Sakhalin in Russia's Far East was never going to be easy, but a political chill has put some of the world's biggest energy projects in an unexpected deep freeze. In the decade since they [an error occurred while processing this directive] negotiated separate drilling agreements with Russian authorities, ExxonMobil and Royal Dutch Shell have gone way over budget and incurred the wrath of leading environmental groups.

But last week, the two oil majors faced their biggest challenge so far: a Kremlin backlash that could hold up or even potentially derail their plans. Moscow revoked a key environmental license for Shell's $20 billion project, and took a tough line with Exxon over likely cost overruns on its $13 billion efforts. Russian officials also took aim at a third big oil exploration site in the Arctic by France's Total, saying it wasn't performing as promised.

Widely interpreted as the latest attempt by the Kremlin to gain control of its massive hydrocarbon resources, the triple whammy sent shivers through the Western oil industry. Russian officials have long grumbled about production-sharing agreements it signed with the three Western firms in the 1990s, when oil prices were one-sixth their current level and Moscow was strapped for cash. "This is what happens when Russian oil companies have their headquarters at the Kremlin," says Robert Amsterdam, the lawyer for Mikhail Khodorkovsky, the jailed former head of Russian oil company Yukos, which authorities seized and broke up in late 2004.

Remarks by a top official at Gazprom, the national energy monolith, just two days after Shell's setback, fueled speculation that it was trying to get a big piece of the Sakhalin projects; in a speech, deputy director Aleksandr Ananenkov laid out a broad vision for that company to link oil fields in eastern Siberia with the Sakhalin project to create one vast network. The affected oil firms have reacted guardedly, but others have been blunt in their criticism — most notably Shinzo Abe, Japan's next Prime Minister.

The Sakhalin projects are supposed to become a major source of liquefied natural gas for Japan, and two Japanese companies are Shell's partners. "I am concerned that major delays might have a negative influence on overall Japanese-Russian relations," Abe warned. The political and business forcast for Sakhalin: already cold, with increasing iciness likely.