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. Last Updated: 07/27/2016

Lucrative Gas Rights Sought by All Sides

The future of one of Russia's most controversial and richest deals -- involving business, politics, Russia's nuclear submarine industry. Western mining companies and a giant natural gas deposit -- is expected to be decided by President Boris Yeltsin at a cabinet meeting Tuesday.


The prize is the Stockmann natural gas field deep inside the Arctic Circle, 300 meters under the Barents Sea off the island of Novaya Zemlya. Developing the off-shore deposit will cost about $8 billion and take 10 years but the field is huge, with reserves of 3 trillion tons of natural gas.


Yeltsin must decide between a foreign consortium, which has worked for three years on the project and spent millions of dollars, and a politically powerful Russian consortium, which says it should be given control of the project for economic and security reasons and just plain patriotism.


Yeltsin's decision will be a litmus test both for Russia's military-industrial complex, which is struggling to keep intact its technical and financial strength in the post-Cold War world, and for Western mining companies looking for equal treatment from Moscow.


The foreign consortium, Arctic Star -- backed, by the Norwegian firm Norsk Hydro, the U. S. -based Conoco Overseas Oil firm and the Finnish Barents Group, all with off-shore drilling experience -- started looking at the deposit in 1989. They have already spent millions of dollars and all along they expected to be fifty-fifty partners in the deal.


Svein Brievik, Norsk Hydro's vice president for exploration in Russia, said the Western consortium wanted balanced participation with the Russian consortium, Rosshelf, which is seeking new activity due to the scaling down of the country's nuclear submarine-building industry.


"We recognize that some of the companies in Rosshelf are experienced in both engineering and building steel structures", he said. "But we feel it is important we have an equal say in the project because of our experience in off-shore technology".


James Tilley, energy director at Conoco, told The Moscow Times that crucial meetings would be taking place over the next few days and that the company is willing to work with Rosshelf.


The Russian television program "Itogi" reported on Sunday night that the cabinet would meet Tuesday and consider a proposal from Energy Minister Viktor Chernomyrdin that would favor Rosshelf.


Rosshelf, which appeared on the scene at the start of this year, backed by the Russian gas industry, two big steel mills and Russia's now underemployed nuclear submarine industry, says it wants control of the project.


Vyacheslav Kuznetsov, executive secretary of Rosshelf, said: "The priority must go to Russian firms. We will find a space for all who want to work there but we will not give up control".


The Rosshelf consortium includes SevMash, a plant that employs 60, 000 workers making the Typhoon nuclear submarine and is the lifeblood of the company town of Severodvinsk near Arkhanglesk in Russia's Far North. Kuznetsov contends that Rosshelf can use its deep sea experience for the Stockmann project and that the Russian government has a responsibility to back it.


Because firms like SevMash represent Russia's highest technology and employ thousands of workers, they have considerable influence as lobby groups.


Last week, after Yeltsin told South Korea he would cut submarine production by half. Deputy Prime Minister Valery Makharadze went to SevMash to assure them their jobs were safe.


The Russian military has also flexed it muscles to back Rosshelf. A vice admiral of the Russian Navy went on "Itogi" on Sunday claiming a Western-run consortium would be a security threat to Russia's naval bases.


But for Western mining companies, the decision on the Stockmann gas field will be a pointer to other projects where Russian companies are now lobbying the government for a stake, and even a controlling interest, despite bids from Western firms.


The biggest is the Udokan copper deposit in Siberia where British RTZ Corp. , and the Australian firm BHP, are pitted against a Russian consortium led by UralMash, the Russian steel and engineering giant.


In August, the government passed a law requiring that all mining projects be put up for competitive international bidding.


The first deal awarded under the process was the Sakhalin oil contract.


But Kuznetsov says Rosshelf wants to exclude foreigners from the bidding process, known technically as a "tender". He says if the government chooses, the law allows it to restrict the tender to Russian firms undertaking conversion.


He adds that Rosshelf has found financial backing for the project, but not in the West. It has signed a memorandum of understanding in which it will use its share in the mining rights as a deposit for a $5 billion loan once it has been awarded the deal. It will then offer a minority interest to Western firms.