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RIA Novosti (Moscow): Russia’s minister warns of losses in Sakhalin II project

Sakhalin II

RIA Novosti (Moscow): Russia’s minister warns of losses in Sakhalin II project

18:19 | 12/ 09/ 2006 

MOSCOW, September 12 (RIA Novosti) – Russia could lose $10 billion in the Sakhalin II oil and gas project if operators continue to increase expenses, Russia’s natural resources minister Tuesday.

The Sakhalin II project, which is run by the Sakhalin Energy Investment Company and controlled by Royal Dutch Shell, has had a history of controversy since its inception. In the latest challenge to its viability, development costs have reportedly doubled to about $20 billion as global commodity prices have risen.

“Operators’ plans to increase reimbursable costs are not acceptable to the Russian side,” Yury Trutnev said. “We cannot avoid reacting. If these plans are implemented, the Russian Federation will lose some $10 billion.”

“The Russian Federation is obliged to protect its interests,” he said. “In no way does this situation mean a worsening of the investment climate in Russia.”

Trutnev’s comments came against the backdrop of a recent campaign launched by Russia’s environmental watchdog Rosprirodnadzor to suspend the Sakhalin II project.

Posprirodnadzor said last week it was taking legal action to overturn the conclusions of a state ecological probe into the project off the country’s Pacific coast, conducted in 2003.

If a court upholds the service’s demands, all activity under the Sakhalin II project will be prohibited until the state ecological probe issues a revised conclusion and all environmental violations are eliminated.

The difficulties put in jeopardy contracts with Japan, South Korea and the United States on LNG supplies, which are due to go into effect in 2008.

Some analysts interpreted the environmental watchdog’s decision to be a form of pressure on the British-Dutch group to conclude a deal with Gazprom. They said the Russian energy giant stands to gain a 25+1% share in the Sakhalin project in return for a 50% stake in the massive West Siberian Zapolyarnoye-Neocomian project.

Under Trutnev’s orders, the Federal Service for the Oversight of Natural Resources began inspecting Sakhalin Energy’s alleged violations of ecological legislation and project specifications July 25.

The Sakhalin-II project comprises an oil field with associated gas, a natural gas field with associated condensate production, a pipeline, a liquefied natural gas plant and an LNG export terminal.

The two fields hold reserves totaling 150 million metric tons of oil and 500 billion cubic meters of natural gas.

The Sakhalin Energy comprises Shell Sakhalin Holding (55%), Mitsui Sakhalin Development (25%) and Mitsubishi-controlled Diamond Gas Sakhalin (20%).

Earlier in the year, environmental concerns prompted the European Bank of Reconstruction and Development to withhold a loan for a pipeline.

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