Royal Dutch Shell Group .com Rotating Header Image

The Moscow Times: Shell, Exxon Under Fire on Sakhalin

By Dmitry Zhdannikov
Friday, August 4, 2006. Issue 3468. Page 5.

Work on the Sakhalin-2 gas pipeline, here pictured last June, may be halted.
Russia stepped up pressure Thursday on two Sakhalin oil consortiums led by Royal Dutch Shell and ExxonMobil as analysts said the Kremlin wanted better terms for state firms.

The Natural Resources Ministry’s environmental watchdog said it wanted Shell to suspend building pipelines on its giant Sakhalin-2 oil and gas project for ecological reasons.

Separately, Kommersant quoted sources at Gazprom as saying the gas monopoly would oppose a plan by Exxon to build a gas pipeline from Sakhalin-1 to China as it has a bigger rival project.

Analysts have long said Russia could not by law change terms of the production-sharing agreements, or PSAs, despite regular criticism of the projects. They say the country is simply seeking better terms for its companies.

“These statements may simply be part of a negotiating process with the foreign companies over who should pay for the large cost overruns at Sakhalin-2,” Deutsche UFG said in a recent note.

“It may also be the result of too much oil money flowing through resource economies and convincing governments (such as in Venezuela, Bolivia and Iran) that they no longer have to pay attention to world opinion on legal issues like the sanctity of international contracts,” the bank said.
Shell’s Sakhalin-2, which also brings together Japan’s Mitsui and Mitsubishi, has been producing small volumes of crude since 1999 and is building the world’s largest liquefied natural gas plant, due on stream in 2008.

Gazprom has agreed to swap a 50 percent stake in its Siberian field against a 25 percent share of Sakhalin-2 as it seeks more exposure in the Far East. Talks stalled after Shell doubled the project’s cost estimate to $20 billion last year.

On Thursday, Oleg Mitvol, the deputy head of the Natural Resources Ministry’s ecological department, said Shell should stop building onshore pipelines as they could be destroyed by mudflows. Mitvol is known for strident public pronouncements

The Industry and Energy Ministry, which overlooks all of the PSAs, has repeatedly confirmed the safety of Sakhalin-2.

The Natural Resources Ministry shocked shareholders when it said that Sakhalin-2 was inefficient and that Russia should increase its ownership in the project to 50 percent. The Industry and Energy Ministry played down the statement, saying it was possible only via arbitration abroad.

“Any moves by the government to revise the terms of the PSAs would have catastrophic implications for the investment climate, and we are certain that more responsible officials are fully aware of that,” Aton brokerage said in a recent note.

Ivan Chernyakhovsky, spokesman for Sakhalin-2, said the pipelines had been cleared by the state environmental watchdog in 2003 and were well protected from mudflows.

Exxon’s Sakhalin-1 is criticized much more rarely than Shell’s project, despite also running behind schedule to start large-scale exports of crude.

Exxon plans to produce 250,000 barrels per day by the end of this year but has yet to find buyers for massive gas reserves. Customers in Japan and South Korea have said they prefer LNG to pipeline gas shipments.

Exxon and its partners, which include state oil firm Rosneft and Japan’s Sodeco, are in talks with China’s CNPC to build a $1 billion pipeline from Sakhalin and sell up to 8 billion cubic meters of gas per year.

Exxon’s pipeline “is not foreseen in the program of development of Russia’s Far East and East Siberia and does not meet the goal of development of gas transportation system in the country’s east,” Kommersant quoted the Gazprom source as saying. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

Comments are closed.

%d bloggers like this: