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RIA Novosti: Sakhalin II is one of Russia’s top priority projects – Kremlin aide

05/09/2006 20:08 MOSCOW, September 5 (RIA Novosti) – The Sakhalin II project in Russia’s Far East is one of the country’s top priority energy projects, a Kremlin aide said Tuesday, against the backdrop of an ecological dispute.

“Russia considers the Sakhalin II project as one of its most serious projects,” Igor Shuvalov said.

Russia’s environmental protection agency, Posprirodnadzor, said earlier in the day it is taking legal action to overturn the conclusions of a state ecological probe, conducted in 2003 into the project off the country’s Pacific coast.

Shuvalov highlighted a recent settlement of a similar ecological dispute around the East Siberia-Pacific Ocean oil pipeline.

“While drafting [a project] on an oil pipeline to the Pacific Ocean, we had a lot of problems with public watchdogs,” he said.

In April, President Vladimir Putin ordered the Siberia-Pacific Ocean pipeline rerouted from its original path, which would have seen it run within 800 meters of Lake Baikal, the world’s largest body of fresh water and a UNESCO-listed World Heritage Site. And in May, Russia’s oil company Transneft said the new route would be 10 times farther away than Putin had suggested should be the absolute minimum

The court move is the latest problem for Sakhalin Energy Investment Company, which currently comprises Shell Sakhalin Holding (55%), Mitsui Sakhalin Development (25%) and Mitsubishi-controlled Diamond Gas Sakhalin (20%). Environmental concerns earlier in the year prompted the European Bank of Reconstruction and Development to withhold a loan for pipeline plans.

Shuvalov said he saw no grounds for Rosprirodnadzor’s claims to the members of the production sharing agreement.

“I see no reasons for such an intimidating move. If talk of ‘deliberate pressure’ is true, I also do not see grounds for this, since another mechanism should be applied to ease the situation without damaging our reputation,” he said.

The Federal Service for the Oversight of Natural Resources started an inspection of Sakhalin Energy’s alleged violations of ecological legislation and project specifications July 25, on the orders of Natural Resources Minister Yury Trutnev.

If the Moscow district court meets the service’s demands, all activities under the Sakhalin II project will be prohibited until the state ecological probe issues new conclusions and all violations of environmental legislation are eliminated.

The service said its experts found the company failed to build anti-erosion facilities and had registered excessive disposal of industrial wastewater from the Molikpaq offshore production platform.

“In addition, Sakhalin Energy consistently violated the schedule for submitting statistical reports on water consumption,” the agency said last week. “In 2005, the Federal Service for the Oversight of Natural Resources registered excessive disposal of industrial wastewater from the Molikpaq platform, which is a violation of the Russian Water Code.”

It also said Sakhalin Energy had failed to submit timely reports on all prospecting and geological work.

And with the energy industry reeling from the shock of the BP oil spill in Alaska, Shell suspended pipe-laying operations for a liquefied natural gas plant after the environmental agency complained about the landslide threat, and announced today it was halting work on a second stretch.

But some analysts have interpreted the environmental watchdog’s decision as a form of pressure on the British/Dutch company to conclude a deal with Gazprom, because the Russian energy giant is looking to gain a 25+1% share in the Sakhalin project in return for a 50% stake in the massive West Siberian Zapolyarnoye-Neocomian project.

Shell announced last July it had signed a memorandum of understanding with Gazprom on the swap, which it said then was “strategically important to both parties.”

With the Russian government seemingly seeking to concentrate the nation’s wealth in its own hands – a decision is still hanging in the air as to who will partner Gazprom in the mammoth Shotkman gas condensate field – the deal has gone no further.

Costs on Sakhalin II have reportedly doubled to about $20 billion with rising commodity prices across the world, which has led Gazprom to say it wants to reduce the stake it would like to offer in Zapolyarnoye-Neocomian, because the value of the Sakhalin asset has fallen.

The Sakhalin-II project comprises an oil field with associated gas, a natural gas field with associated condensate production, pipeline, a liquefied natural gas plant and an LNG export terminal. The total reserves of the two fields are 150 million metric tons of oil and 500 billion cubic meters of natural gas.

The sister Sakhalin-I oil and gas project is operated by U.S. giant ExxonMobil, and state-owned oil company Rosneft holds a 20% stake. Rosneft is also seeking a role in the Sakhalin III project.

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