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AFX Europe (Focus): Russia angry at 10 bln usd Sakhalin-2 cost overruns

Published: Sep 13, 2006

MOSCOW (AFX) – Russia’s Natural Resources Minister Yury Trutnev has criticized cost overruns at the vast Sakhalin-2 oil and gas project in the Russian Far East led by Royal Dutch Shell.

Under the production-sharing agreement that governs the project, the state receives a share of revenues once the initial investment has been paid off. However, Shell announced in July 2005 that the investment required to develop the project had doubled to 20 bln usd from 10 bln usd, meaning that the Russian government will have to wait much longer for its share of revenues.

“If these intentions are carried out, the Russian Federation will lose 10 bln usd,” Trutnev said in a statement released by his ministry.

Trutnev said that he did not want to call into question the agreement, which ensures stable tax conditions for the investors, but he stressed that respect for the conditions of the agreement were “obligatory for both sides.”

“The Russian Federation is required to defend its interests,” Trutnev said.

Last week Russia’s state environmental agency launched a legal challenge that could block work at Sakhalin-2, a move analysts linked to a breakdown in talks between operator Sakhalin Energy and state gas monopoly Gazprom, which is seeking a 25 pct stake in the project.

The two companies agreed in 2005 to a swap in which Gazprom would receive 25 pct of Sakhalin-2 in exchange for 50 pc t of Gazprom’s Zapolyarnoye natural gas field in Siberia.

Just weeks after reaching an agreement, however, Sakhalin Energy revised its cost estimates to 20 bln usd, leading Gazprom to call the swap unfair and demand better terms.

The project is currently 55 pct-owned by Shell, with the remaining stake split by Japanese companies Mitsui (25 pct) and Mitsubishi (20 pct).

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