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Financial Times: Cynical in Sakhalin

Published: September 19 2006 22:29 | Last updated: September 19 2006 22:29

Russia’s concern for the grey whale and the Sakhalin salmon is as pleasing as it is surprising. After all, Russia’s most famous fish, the sturgeon, is threatened with extinction because of overfishing, dam-building and industrial pollution. Though environmentalists will welcome Russia’s plans to suspend the $20bn (£10.6bn) Sakhalin-2 energy project, run by Royal Dutch Shell, others will wonder why Shell has been singled out. Russia should address environmental concerns. But shutting down large foreign investors is not the way to do it.

Russia’s natural resources ministry has cancelled a permit Shell needs on the grounds that it is polluting Sakhalin’s rivers and seas. Sakhalin, a large island off Russia’s Asian coast, has an estimated 45bn barrels of oil and gas. Shell, which has already suffered a doubling of costs on Sakhalin-2, and the project’s end customers in Japan and South Korea are all counting on rapid extraction of those hydrocarbons.

Environmental worries about Sakhalin-2 are real: both western and Russian non-governmental organisations have been vocal opponents. But Russia’s natural resources ministry has also argued that Sakhalin-2, and similar agreements signed with ExxonMobil and Total in the mid-1990s, are too generous to the western oil companies. Sakhalin-2 has particular problems. Gazprom, Russia’s state gas company, agreed to buy into the project last year, shortly before Shell announced the rise in costs. Now Gazprom is seeking better terms. If the withdrawal of Shell’s permit is politically motivated, it will undermine the rule of contract and the wider rule of law in Russia. Foreign investors, despite their lust for Russia’s mineral wealth, will be deterred. European countries, meanwhile, will try even harder to find alternatives to a dependency on Russian gas.

Russia’s ministries may be calculating that foreign oil companies need Russian reserves too much to complain. But they would be in error. Oil majors will not invest if all the profit from successful projects is creamed off by the Russian government. Russia, meanwhile, does need foreign capital and technology, especially to develop offshore fields such as Sakhalin.

Foreign investment should not be at the expense of the environment and, if Shell has broken the rules, it should be fined or told to make good the damage. But the rules must be applied consistently and with due process: suddenly withdrawing permits is no way to treat a corner shop, let alone a $20bn investor. Russia signed a contract with Shell for Sakhalin. It should honour that contract: letter and spirit.

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