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Financial Times: $20bn Royal Dutch Shell project faces Russian snag

By Neil Buckley in Moscow
Published: September 18 2006 03:00 | Last updated: September 18 2006 03:00

Russian officials vowed to step up efforts to remove a key environmental permit for a $20bn natural gas project led by Royal Dutch Shell in the Russian fareast after the country’s prosecutor-general said the permit did not comply with the law.

The prosecutor’s statement, released on its website on Saturday, could significantly strengthen the hand of Russia’s environmental watchdog as it attempts to halt work on the massive Sakhalin-2 project, alleging abuses of environmental laws.

Analysts have warned that the forced suspension of work on one of the world’s biggest energy projects could deal a serious blow to investor sentiment, at a time when foreign direct investment in Russia is running at record levels.

The prosecutor-general said that a document from Russia’s natural resources ministry endorsing an environmental feasibility study that gave the go-ahead for the second stage of Sakhalin-2 “was drawn up in violation of the current legislative requirements and is subject to annulment”.

Russia’s environmental watchdog, Rosprirodnadzor, said it would use the prosecutor’s statement in a court hearing scheduled for September 21 on its demands to halt work on the project.

Oleg Mitvol, deputy head of the watchdog, told Dow Jones Newswires this weekend he believed the environmental permit could be cancelled as early as this week.

That would halt work on the second phase of the project, which is due to start producing liquefied natural gas for export to Japan and other east Asian markets by summer 2008.

Sakhalin Energy, the Shell-led consortium developing the project, could not be contacted for comment this weekend. Shell has 55 per cent of the project, with Japan’s Mitsui and Mitsubishi holding the rest.

The Russian authorities have been putting increasing pressure on the project in recent months, criticising a cost increase from $10bn to $20bn and alleged damage to the environment.

But many Russian analysts believe the pressure is politically motivated, linked to the Kremlin’s desire to see Gazprom, the Russian natural gas giant, take a stake in the project.

The Kremlin has moved to re-establish state control of important oil and gas assets, and state-controlled energy giants Gazprom and Rosneft are playing an increasingly dominant role in Russia’s energy industry.

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