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By John Helmer in Moscow

Kremlin insiders fall into disarray over ‘strategic’ mineral resources.

Only in Russian politics can it be true that a politician, who is commanding in the polls, may also lack the authority to rule. And only in Russia is the political solution for this to lock everyone up.

In 1925, Mikhail Zoshchenko, the comedian of Russian life after the Communist revolution, wrote a tale called “Nervous People”. On the surface, it was about nothing more than an argument in a communal kitchen over whose property a pot-scourer was. “Nerves are always shaken after a civil war”, the narrator starts off his recounting. Two women started the fight; two men, one a cripple, joined it. The one-legged man came off worst, floored by a saucepan to the skull. The militiaman called to scene was able to break up the fight by shouting: “Get the coffins ready, you bastards! I’m going to shoot!” The melee dispersed, except for the cripple on the floor. Zoshchenko reminds the Soviet reader what always happens. “The People’s Judge was a nervous sort of man, too: he booked everyone.”

Never mind that, today, Moscow and St.Petersburg are brimming with the riches earned from crude oil and other commodities tied to the Brent benchmark of $92-per-barrel. Russians, those on top and those beneath, remain very nervous people.

President Vladimir Putin commands undisputed popular support. He is so popular, he would easily carry a constitutional amendment, allowing him to serve for another term, starting in March 2008. But at the same time, he is too weak to curb the growing conflict between his security services and his closest personal assistants. They include the chief of his personal bodyguard, his principal policy assistants, his chief prosecutor, the chief of the drug control police (who also include the tax agents), and the head of a brand-new force called the Investigative Committee – all of them Soviet KGB men, and onetime career associates and friends of Putin himself.

This conflict recently turned into a near shooting-match at a Moscow airport between platoons loyal to each. It caused the ouster of the chief of the Foreign Intelligence Service, and his replacement by a man whose qualification for intelligence work is his unthinking loyalty. But since the President insists he is leaving office in five months’ time, loyalty to who follows him is a question Putin’s men are nervous about today. And so, they have started fighting – and Putin is not strong enough to stop them by the only methods Zoshchenko identified – lock them all up, or shoot them.

A similar problem recently arose when these same men could not make up their minds over how to control the future development of Russia’s rich, but unmined natural resources.

The problem is not new. When the current federal Minister of Natural Resources, Yury Trutnev, was appointed to office in the spring of 2004, he was persuaded by the big Russian oil and mining interests – especially by LUKoil chairman, Vagit Alekperov, who had most to do with putting Trutnev where he was – that he could draft amendments to the so-called Sub-Soil Law, and have them enacted by parliament, then signed by the President at top speed. In his first major speech on the subject, in July 2004, Trutnev promised to accelerate the award of licences to major oil, gas, gold and copper deposits within 45 days, instead of six months.

That was hot air. In March 2005, the accelerator hadn’t been enacted. A new obstacle had been drafted instead – definition of a threshold tonnage of mineable reserves or resources, which would make oilfields, gas fields, and mineral deposits strategic for Russia’s economic security, and thus excluded for foreign-owned mining companies. A draft of these provisions was sent to the State Duma on June 17, 2005.

For the next year, Trutnev’s ministry tried to get other ministries, the Kremlin, and the parliamentary deputies to agree to explicit thresholds for strategic deposits, initially putting the barrier at 150 million tonnes for crude oil deposits; 1 trillion cubic metres for gas; and 10 million tonnes for copper. Above these limits was no-go for foreign companies. By these criteria, just five deposits appeared to be strategic exclusions — the oil deposits of Titov and Trebs; the Chayadinskoye oil and gas deposit; Sukhoi Log gold and Udokan copper.

In mid-2006, Mineweb reported Trutnev’s deputy, Anatoly Potemkin, as confirming the oil threshold, but lowering the one for gas to 75 billion cubic metres. Potemkin didn’t cite the threshold numbers for hard-rock deposits, but he hinted that the target mineral list was being expanded. “We are considering including more natural resources in the [strategic exclusion] list. It may be nickel.”

The country’s chief geologist and a purported personal advisor to Putin, Vladimir Litvinenko, Rector of the St.Petersburg State Mining Institute, also advocated specific project exclusions, as well as reserve thresholds. For example, he said, “the Barents Sea is a special region for our interests.” Referring to Shtokman — the world’s largest undeveloped gas field with 3.7 trillion cubic metres of reserves – Litvinenko said: “What do we need pressure from foreign companies for? We need to perfect the entire conception of the project, and only then should foreign partners be announced.”

What Litvinenko really meant was that he was opposing the award of minority equity stakes to the foreign contenders for Shtokman – Total of France, Statoil of Norway, Chevron-Texaco and Conoco-Philips of the US. Although he purports to be an academician, Litvinenko functions as a lobbyist – and although he has known Putin since the latter’s days as a PhD student, he has been a failure at achieving most of his policy targets.

In October 2006, however, it didn’t seem so. First Putin, then Gazprom announced that they were dropping the idea of awarding equity stakes in Shtokman. A year later, this decision has been reversed.

Last week, Gazprom announced that StatoilHydro, will be granted a 24% equity stake in the Shtokman project. Putin telephoned Norwegian Prime Minister Jens Stoltenberg ahead of Gazprom’s statement to pass the news. The Norwegian stake is one percent less than Total of France, which received its 25% shareholding award in July.

The latest award leaves Gazprom with 51% of the project company. But there are unexplained peculiarities. Gazprom’s official statement indicates that at the completion of Phase 1 of the project, Total and Statoil will be obliged to give up their equity. “Upon completion of the exploitation period of Shtokman’s Phase 1, Total and StatoilHydro will hand over their stakes to Gazprom,” the company announcement reads. The decision eliminates from contention the two American bidders, ChevronTexaco and ConocoPhilips. Both Statoil and Total are paying $800 million each for their stake.

Press reports in Moscow indicate another potential shift in Gazprom’s policy. At the time of the Total announcement three months ago, Gazprom said it would retain full ownership of the field’s gas reserves. It is now reported that StatoilHydro and Total will be able to book their share of the field’s reserves, despite the fact that they will not have access to the Shtokman licence, but only to the field’s operator, which will build and own the infrastructure.

In Phase-1 of the project, production of 23.7 bcm of natural gas per annum will start in 2013. This will be piped to Europe in the first stage. LNG production may also be planned, with shipping by ice-class LNG tankers to Canada to be decided in several years’ time. The Statoil announcement indicates the Phase-1 period will be 25 years. It also cautions that “until the final investment decision is made, StatoilHydro’s exposure is limited to the company’s share of the cost of planning and studies.” Statoil says nothing about being able to book the reserves for such circumscribed exposure.

Just before the Shtokman reversal was disclosed publicly, a brief notice from Trutnev’s ministry revealed that the government had yanked its proposed legislative draft of the strategic thresholds, and was redrafting the language and the numbers. “For now, there will be no law. We’re going with amendments,” said Rinat Gizatullin, Trutnev’s spokesman. He didn’t explain.

A source at the Duma’s Committee on Natural Resources, which has jurisdiction over the bill, told Mineweb: “I can’t comment on anything, unfortunately. I’ve heard that there are amendments pending in the ministry, but they didn’t show us the new draft version. Currently, the Sub-Soil law doesn’t work. I think they are working on corrections of the 2005 draft. I think they will toughen the part for foreigners. But this is only my guess, so please don’t rely on me.”

A source at the ministry told Mineweb: “The problem is that Udokan and Sukhoi Log are not classified as strategic, yet. Formally, we have no strategic deposits. The definition of strategic deposits will be made by a government decree, on the basis of the proposal from the Ministry of Natural Resources. Unfortunately, this mechanism doesn’t work without amendments to the operative legislation. This doesn’t have a definition of strategic deposits or resources. Currently, it is impossible to classify any deposit as strategic, and prohibit foreign investments. If, for example, one wanted to authorize an auction for the licence to mine Sukhoi Log now, there are no legislative ways to limit access to this auction for foreign companies. All announcements of auctions for strategic deposit licences presumes the enactment of the Sub-soil Law amendments beforehand.”

The ministry source said the following reserve figures are the strategic exclusion thresholds: oil, 70 million tonnes; gas, 50 billion cubic metres; gold, 50 tonnes (1.6 million ounces); copper, 500,000 tonnes. For the time being, there are no limits for nickel, platinum, or silver.

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