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Bloomberg: Royal Dutch Shell’s Sakhalin Oilfield Permit Annulled by Russia (Update5)

By Lucian Kim

Sept. 18 (Bloomberg) — A Russian government ministry canceled Royal Dutch Shell Plc’s permit for the $20 billion Sakhalin-2 oil and gas development, as President Vladimir Putin tightens his control over the country’s energy industry.

The Natural Resources Ministry said today in a statement it asked the Russian agency responsible for authorizing oil and gas development to annul Shell’s license. The ministry may also revoke operating permits for Exxon Mobil Corp. and Total SA, Interfax reported earlier, citing an official from the same ministry.

State-run OAO Gazprom is seeking a stake in the Shell-led venture, the biggest foreign investment in Russia, and threats to shut it down may strengthen its negotiating position, said Craig Pennington of Schroders Plc. Putin built up Gazprom and OAO Rosneft with assets seized from OAO Yukos Oil Co. and is using them to assert the nation’s importance as an energy supplier.

“It’s all part of the bargaining for assets up for grabs in Sakhalin-2,” said Pennington, global leader of energy research at Schroders in London. “It’s symptomatic of the Russian industry to take control of key assets at as low a cost as possible.”

The Natural Resources Ministry in May urged Shell, Exxon and Total to cede more control of their ventures to Russian companies. Gazprom is in talks with Shell about swapping assets to acquire a 25 percent stake in Sakhalin-2.

Feasibility Study

Sakhalin Energy, the project operator, must resubmit the feasibility study upon which the project was based, Natural Resources Minister Yuri Trutnev said in a separate statement today. The process may take six months or longer, his spokesman, Rinat Gizatulin, said in a phone interview.

“Sakhalin Energy hasn’t made an attempt to solve the problems by consultation or negotiations, which has led to the current situation,” Trutnev said. The company failed to address environmental violations over the course of three years, he said.

Shell said it was confident the Russian government would honor its obligations under the agreement. The company also said no applicable laws have been violated and that there are no “valid” grounds to revoke the permit.

“We will continue to work with the Russian authorities to resolve the issue and thereby maintain confidence of international customers in Japan, Korea and North America,” Shell said today in an e-mailed statement. “Annulment could be damaging for the project and for Russia and lead to delays.”

Construction at the project continues, said Shell spokesman Andy Corrigan in London.

Exxon Venture

The ministry in May told BP Plc’s Russian venture, OAO TNK-BP holding, it must reach an accord with state-run Gazprom to revive an $18 billion Siberian natural-gas venture. Gazprom is in talks to buy the 50 percent of TNK-BP that BP doesn’t own, Vedomosti reported today, citing Gazprom officials.

Gazprom spokesman Sergei Kupriyanov declined to comment on the Vedomosti report.

Exxon runs the Sakhalin-1 project with partners that include state oil company Rosneft, which holds 20 percent. Project costs will rise 33 percent to $17 billion, Exxon spokesman Robert Davis said today from Houston.

Russia’s Kommersant newspaper reported earlier that while Exxon had presented the revised budget last year, the government hadn’t been exerting pressure on Sakhalin-1 because of Rosneft’s participation.

`Good Relationship’

“We have a very good relationship with the Sakhalin authorities and we’ll continue to work through issues as they come up,” Mark Albers, Exxon’s president of development, told reporters during a conference in London today. Exxon is not in danger of losing its Sakhalin-1 license, he said.

Sakhalin is one of Russia’s richest petroleum provinces, with as much oil and gas as the North Sea, attracting companies such as Exxon, BP Plc and India’s Oil & Natural Gas Corp. Shell’s venture is the most advanced.

Shell is drilling in Russian-owned seas north of Japan as dwindling energy supplies force producers to venture into increasingly hostile locations. Costs for Sakhalin-2, the company’s biggest single investment, have doubled to $20 billion, undermining Shell’s effort to convince investors it can replace the oil it pumps, two years after overstating reserves.

The Prosecutor General’s Office two days ago agreed with the Natural Resource Ministry’s conclusion that the original permit for Sakhalin-2’s second phase shouldn’t have been approved, giving it the legal power to annul the 2003 decision.

Sakhalin-2, located seven time zones east of Moscow, is completely foreign-owned, with Shell holding 55 percent, Mitsui & Co. 25 percent and Mitsubishi Corp. 20 percent. Shell expects deliveries of liquefied natural gas to start in 2008.

Earlier today, Sergei Fyodorov, a Natural Resources Ministry official, said the Exxon and Total projects may also be canceled for violating “technical” requirements of their licenses, Interfax reported.

Total has a production-sharing agreement that governs the Kharyaga oilfield in northern Russia.

Total spokesman Paul Floren declined to comment on the Interfax report.

To contact the reporter on this story: Lucian Kim in Moscow at [email protected]

Last Updated: September 18, 2006 13:51 EDT and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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