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. Last Updated: 07/27/2016

Oil Group to Begin Sakhalin Investment

An international consortium of five oil companies agreed Tuesday to begin investment in a $10 billion project to extract oil and gas off Sakhalin Island, but oil analysts said the announcement does not mean oil extraction will begin anytime soon.


The Sakhalin-2 consortium informed the Russian government in a letter Tuesday that it would begin investing in the development of two oil and gas fields, but one company executive said questions regarding Russia's controversial oil production sharing law would have to be ironed out before significant expenditures were made.


"We feel it is appropriate to move forward, but more work still needs to be done on the production sharing law," said the executive, who asked not to be identified. Among other things, the consortium wants the right to have any future disputes settled in an international court.


Parliament is expected in June to discuss changes to the sharing law.


The Sakhalin consortium includes Royal Dutch/Shell, Japanese concerns Mitsui and Mitsubishi, and U.S. companies Marathon and McDermott. It agreed in June 1994 to invest $10 billion in the Lunskoye and Piltun Astokhskoye fields off Russia's Far East Sakhalin Island. The fields are estimated to contain 100 million tons of oil (750 million barrels) and 14 trillion cubic feet of gas.


The agreement stipulated that the consortium had until Tuesday to signal that it would go forward with investment.


A spokesman for the Fuel and Energy Ministry confirmed that the government had received notice from the Sakhalin consortium, but did not give further details.


An oil analyst said the announcement does not signify that oil companies are becoming more optimistic about foreign investments in Russia's risky investment climate.


Some investors remain edgy about the June presidential elections, in which President Boris Yeltsin faces a strong challenge from Communist Party candidate Gennady Zyuganov.


"You can tell when [Western oil companies] will be assured, and that is when they start putting money into the ground," said Stuart Amor, an oil analyst at CS First Boston in London.


Alexander Blokhin, oil analyst at the United Financial Group in Moscow, said the Sakhalin consortium to date has invested about $80 million in the project, but to begin extraction it still must invest $1 billion.


He added, however, that oil companies are hopeful that the elections will not adversely affect on the Western investments in Russia's oil complex.


"Western oil companies are counting on the fact that Yeltsin, or at least a democrat, will win the elections," he said.