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MarketWatch: Russian minister orders Sakhalin Energy to stop pipe-laying

Last Update: 9:18 AM ET Aug 3, 2006

MOSCOW (MarketWatch) — The Russian Natural Resources Ministry has instructed the Sakhalin Energy Invest Ltd. consortium to stop laying an oil pipeline along the shore of the Sakhalin island.

The Ministry said in a statement that the pipe, as is being laid at present, is vulnerable to floods from mountain rivers and thus represents an environmental hazard.

The Ministry said research by the Russian Academy of Sciences had concluded that some 20 kilometers of pipeline were exposed to such risks, as a result of “unqualified decisions taken during by Sakhalin Energy at the time of its feasibility study.”

It added such documents as it has from Sakhalin Energy “give no indication of how to solve the problem of the pipeline’s safety in the majority of areas at risk.”

The Ministry has already criticized the consortium for overrunning its original cost estimates and for delays in starting production, as a result of which the government now expects not receive any revenue from the project before 2014.

The Sakhalin Energy consortium, developing the Sakhalin-2 project, is 55% owned by Royal Dutch Shell Group (RDSB.LN), while a subsidiary of Japan’s Mitsui (8031.TO), has a 25% stake and Diamond Gas Sakhalin, a subsidiary of Japan’s Mitsubishi Corp. (8058.TO), holds 20%. Russian gas monopoly OAO Gazprom (GSPBEX.RS) is negotiating to take a minority stake in the project.

The project is overwhelmingly dedicated to producing liquefied natural gas, and will of produce 9.6 million metric tons a year when fully operational.

No one at Sakhalin Energy was initially able to comment.

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