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Financial Times: Moscow faces global oil backlash

Sep 20 2006, By Neil Buckley and Arkady Ostrovsky in Moscow, Ed Crooks in,London, Sarah Laitner in Brussels and David Pilling in Tokyo, Financial Times

Russia was facing a global backlash on Tuesday over its threat to halt work on a $20bn (£10.6bn) energy project led by Royal Dutch Shell.

Japan led the chorus of anger. Shinzo Abe, chief cabinet secretary and front-runner to be next prime minister, warned the move would damage international relations and jeopardise foreign investment. The European Union voiced concern and Britain protested to the Russian authorities.

But even as the international community was protesting against the suspension of an environmental permit for the Royal Dutch Shell-led Sakhalin-2 project, it emerged that another large foreign energy project faced a similar threat.

Russian prosecutors have threatened to suspend an exploration licence for TNK-BP, the Anglo-Russian joint venture, to develop Kovykta, the massive gas field in Eastern Siberia.

A source familiar with the situation said prosecutors in Irkutsk, capital of Eastern Siberia, demanded a local agency for natural resources suspend TNK-BP’s licence on environmental grounds and for failing to fulfil its terms.

On Tuesday Russia insisted its move to cancel the environmental permit for Sakhalin-2 was not politically motivated and was prompted entirely by environmental concerns.

If the move is ratified by Russia’s industrial safety agency, work on the huge gas and oil development would be halted.

Oleg Mitvol, deputy head of Russia’s environmental watchdog, accused the project operators of serious breaches of environmental law, including marine and river pollution on the Pacific island of Sakhalin. He expected the natural resources ministry’s decision to revoke the permit to be approved by a further technical body within days.

Ministry officials say the Shell-led consortium would be forced to suspend work on phase two of the project, which includes building the world’s largest liquefied natural gas plant and pipelines linking it to offshore oil fields.

The suspension of Shell’s permit has been widely seen as a tactic to secure a better stake in the project for the Russian government: a charge the authorities strongly rejected on Tuesday. The moves against Shell and TNK-BP come as the Kremlin looks to expand its influence over the energy sector. It is known to want Gazprom to take a substantial stake in Sakhalin-2. Gazprom is also seen as the front-runner to replace the private Russian partners in the TNK-BP venture.

The move was keenly felt in Japan, where Sakhalin gas and oil are crucial for strengthening energy security and reducing dependence on the Middle East. The trading companies Mitsui and Mitsubishi own 25 per cent and 20 per cent of the project, with the rest owned by Shell.

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