Russ Oil-Gas

February 25, 2008 - International Herald Tribune - by Judy Dempsey - BERLIN: In a court case closely watched by investors, a Texas company is accusing Gazprom of refusing to honor an investment and property agreement in one of the biggest natural gas fields in Russia. Richard Moncrief, chairman of Moncrief Oil International, said he had decided to use the German courts to establish what he said was a 40 percent stake worth $12 billion, in the vast Yuzhno-Russkoye field in western Siberia. The field is intended to supply the underwater Nord Stream pipeline, through which Russia will be able to supply natural gas directly to Germany and Western Europe, bypassing Ukraine, Belarus and Poland. Gazprom, owned by the Russian state, is the world's largest natural gas company, with a vast network of fields in the Arctic and Siberia. Moncrief obtained the stake in the Yuzhno-Russkoye field a decade ago, with a Gazprom subsidiary holding the remainder, according to documents filed in court in connection with the lawsuit and reviewed by the International Herald Tribune. Moncrief insists that his claim is still valid, while Gazprom has neither rejected nor accepted it. His hopes, he said, were now pinned on the Landgericht Berlin, a regional court that will decide within a few weeks whether Moncrief can begin proceedings against Gazprom in the German capital. If so, it could cause Gazprom "just a little embarrassment," according to Anders Aslund, a Russia specialist at the Peterson Institute for International Economics in Washington. "Taking over gas fields one by one has been a standard way of doing business by Gazprom," he said. "Few companies which have dared challenge Russia in the courts have won." Klaus Nieding, the lawyer representing Moncrief in Germany, said he was "cautiously optimistic that the German courts will say 'yes' to German jurisdiction." Under German law, if a foreign company has a subsidiary in the country, which in this case Gazprom has through its subsidiary Gazprom Germania, the courts may choose to exercise jurisdiction. "If the court says yes, we will have an interesting situation, insofar as a Russian party is being sued in a German court," added Nieding. "Justice is not being sought in Russia. We do not have any illusions concerning Russian justice." The case also raises important questions about the validity of contracts, property rights and the treatment of investors in Russia, issues that have been vexing ever since the collapse of the Soviet Union in 1991, legal experts said. Big multinational companies have been venturing into Russia, with varying degrees of success, since the early 1990s. Royal Dutch Shell and BP recently ran into problems with the Russian authorities over the terms of investments and property rights. Those disputes were settled outside court, as the Russians tend to prefer. However, the Kremlin has used the courts when doing so suited its purpose. It took Yukos, the Russian energy company owned by Mikhail Khodorkovsky, to court on charges of corruption and tax fraud. Khodorkovsky, once considered a potential presidential candidate, was sentenced in May 2005 to nine years in a Siberian prison. Yukos was broken up and most of its assets were taken over by Gazprom. Moncrief, 65, a Texan whose private oil and natural gas business was established by his grandfather in 1935, said he did not intend to give up attempts to enforce his company's right to the field. "This is about bringing out the facts about our claim," Moncrief said during an interview. "We do not view our agreement with Gazprom as a memorandum of understanding. We view it as a binding contract." Moncrief was referring to the original contracts signed for a stake in the Yuzhno-Russkoye gas field in 1997 and 1998. He claims his counterpart was Vladimir Nikiforov, then the general director of a Gazprom subsidiary, Zapsibgazprom. Moncrief, however, has been unable to contact Nikiforov, who could be a crucial witness in court. Gazprom declined to answer any questions related to the contracts. "We prefer not to comment on the Moncrief situation," Dennis Ignatiev, a Gazprom spokesman, said in an e-mail. The fate of the Yuzhno-Russkoye field is linked with the Nord Stream pipeline, which was supposed to begin operations in 2010, but which is facing delays in obtaining construction permits. The German-Russian joint venture includes a subsidiary of the German chemical group BASF called Wintershall, and E.ON Ruhrgas, another German company. The deal for the pipeline was signed Sept. 9, 2005, by President Vladimir Putin of Russia and Gerhard Schroder, then the chancellor of Germany. Soon after losing his bid for re-election that same month, Schroder, a friend of Putin, was appointed chairman of Nord Stream, the company overseeing the construction of the pipeline. Wintershall, in addition, became directly involved in Yuzhno-Russkoye. Gazprom offered it a 35 percent stake in 2004 in a deal that was concluded a year later - a deal that came as a surprise to Moncrief and his lawyers. "In 2004, Gazprom silently began to search for new partners for Yuzhno-Russkoye," Nieding said. "It did not tell Moncrief." During this time, Gazprom was doing little drilling in the fields, which the International Energy Agency estimates contains reserves of more than 700 billion cubic meters, or 25 trillion cubic feet, of natural gas. Under the terms of the Moncrief contracts, reviewed by the International Herald Tribune, the Texas company first agreed on Sept. 17, 1997, to provide Zapsibgazprom, the Gazprom subsidiary, with technical know-how and business plans, as well as equity and debt financing from Western financial institutions in return for a stake in the gas field. "It was agreed that Moncrief Oil International provide $1 billion financing for exploration of the field and all other technical support needed, versus a respective interest in the gas field," Nieding said. The documents involving the financing arrangements show that Moncrief lined up Credit Suisse First Boston. By Nov. 12, 1997, the financing was arranged, the documents show. A year later, Moncrief said, his stake was doubled to 40 percent. According to the documents signed at the time, on May 8, 1998, there was a meeting of the Gazprom board at which the deal was approved. "A new company, JSC, was formed for the purpose of holding the license for Yuzhno-Russkoye," Nieding said. The documents stated that Moncrief Oil International was granted 40 percent of the shares in JSC. The deal was never implemented. Moncrief claims the field became the target of corrupt deals and was illegally split from Gazprom. Foreign investors doing business in the late 1990s in Russia had to take enormous risks. Property rights, tenders and legally binding contracts were new concepts. Corruption was rife and a massive transfer of state property to the private sector took place, in many cases under highly dubious circumstances. After being elected president in 1999, Putin started to bring Gazprom under the Kremlin's direct control. "To his credit, Gazprom got the gas field back," Moncrief said. But Moncrief did not get back his stake, even though Gazprom "has never denied or terminated, or attempted to terminate the agreement," he said. When Putin met President George W. Bush in 2002 in the United States, Moncrief said, there was a sense that the tide might turn in his favor. Bush and Putin referred specifically to his company, saying it could serve as a model for future cooperation in the energy sector. But nothing came of it. The Kremlin, asked recently about that meeting, would not comment. "This is a corporate issue," Dmitri Peskov, Putin's spokesman, said. "It has nothing to do with the Kremlin." Moncrief attempted to sue Gazprom in a U.S. court in 2005. The court declined jurisdiction. He sought to sue BASF in a German court two years ago, claiming the company had made a deal with Gazprom over stolen goods. But the Frankenthal district court said that Moncrief had failed to prove that BASF actively persuaded Gazprom to breach its contract. Despite the legal setbacks, Moncrief said he remained determined to establish the title rights over Yuzhno-Russkoye. "We are going to stay in court and pursue this," he said.