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The Wall Street Journal: Russia Ties Probe Of Sakhalin Site To Cost Overrun

September 13, 2006

MOSCOW — Rising environmental scrutiny of the international oil consortium Sakhalin Energy Ltd. is related to a $10 billion cost increase at the project, which will eat into the Russian government’s share of profits, Minister of Natural Resources Yuri Trutnev said.

The announcement follows recent threats by Russia’s environmental watchdog, Rosprirodnadzor, to shut down crude-oil production at the site and halt work on developing gas production because of environmental infractions.

Analysts said Mr. Trutnev’s announcement lends weight to the idea that environmental criticism of the project by state authorities is intended to pressure Sakhalin, rather than to improve the environment.

Sakhalin is majority-owned by Royal Dutch Shell PLC, while a subsidiary of Japan’s Mitsui & Co. holds a 25% stake and Diamond Gas Sakhalin, a subsidiary of Japan’s Mitsubishi Corp., holds 20%. The consortium is developing the Sakhalin-2 oil and natural-gas site on Russia’s Pacific coast.

Sakhalin announced last year that the cost of the project, which is operated under a production sharing agreement, would be double original estimates of $10 billion.

Rosprirodnadzor has since stepped up inspections of the project, and in recent days ordered a halt to work on two pipelines and threatened to pull critical environmental operating licenses pending further inspections.

Under the terms of the agreement, the Russian state may raise its share in the profits only after the companies involved recoup their expenses.

“The Russian side is not pleased by the operator’s attempts to book additional costs,” the ministry said. “We had to react to this,” the ministry cited Mr. Trutnev as saying, “because fulfilling such intentions would mean the Russian Federation would lose $10 billion.” He added that “The Russian Federation simply must protect its own interests.”

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