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Financial Times: Russia cancels Shell permit for Sakhalin-2

By Neil Buckley in Moscow
Published: September 19 2006 03:00 | Last updated: September 19 2006 03:00

Russian authorities cancelled a key environmental permit for a $20bn (£10.7bn) energy project led by Royal Dutch Shell, in a move that could halt work on one of the world’s biggest oil and gas ventures.

The cancellation by the natural resources ministry followed pressure on three of the largest foreign investments in Russian energy – the Shell-led Sakhalin-2 and projects by ExxonMobil of the US and France’s Total – as the Kremlin seeks to bring strategic assets back under state control.

Analysts said the Sakhalin-2 move called into question the sanctity of so-called “production-sharing agreements” – the special legal basis the three projects were granted in the 1990s.

The permit covered phase two of the project, which involves building the world’s biggest liquefied natural gas plant, and pipelines from offshore fields.

Claude Mandil, executive director of the International Energy Agency, said: “We have been very cautious with our supply projections for Russia. We see this kind of policy is not conducive for foreign investment.”

Analysts said the zeal with which Moscow authorities were pursuing Sakhalin-2’s environmental lapses – contrasting with a laxer approach elsewhere – hinted at political motives. They said it may be linked to the Kremlin’s desire to see Gazprom, the state-controlled natural gas monopoly, take a stake.

Shell agreed last year on an asset swap that would see Gazprom take 25 per cent of Sakhalin-2 and Shell’s stake fall from 55 to 30 per cent.

Sakhalin Energy, the Shell-led consortium, said yesterday there were “no valid grounds” to revoke the permit. Russia’s natural resources ministry, whose decision must still be ratified by another body, insisted it had no political motive.

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