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The New York Times: Russia Criticized for Withdrawing Sakhalin Oil Permit

Published: September 20, 2006

MOSCOW, Sept. 19 — In a sharp face-off involving Russian energy policy, Japan, Britain and the European Union expressed worries on Tuesday about a dispute between the Russian government and a consortium led by Royal Dutch Shell that is developing one of the world’s largest oil and natural gas deposits on Sakhalin Island.

A day earlier, Russian regulators withdrew an environmental permit for a $20 billion oil and natural gas development, Sakhalin II, where Japan’s two largest trading and engineering companies, Mitsui and Mitsubishi, are minority owners.

The Russian action sent ripples through European and Asian government offices. Shell, the primary operator and owner of 55 percent of the huge development, has also protested the decision.

Japan’s chief cabinet secretary, Shinzo Abe, who is expected to be the next prime minister, was quoted by Reuters as saying, “I am concerned that major delays might have a negative influence on overall Japan-Russian relations.”

Though couched in diplomatic tones, the statement was a sterner public rebuke than Japan issued to Russia last month after border guards fired a machine gun at a fishing boat that strayed into Russian waters, killing a fisherman.

Energy analysts say it is not so much that Russia has a tin ear for how its policies are viewed in other countries. Rather, they say, the Russians are taking the risk of angering the home governments of foreign oil companies because they consider the potential gains from renegotiating the deal as too attractive not to.

“There’s a lot of talk,” Stephen O’Sullivan of Deutsche UFG in Moscow, said in a telephone interview. “But the downside from the Russian side is fairly limited.”

Under existing terms, the projects of Shell and of Exxon Mobil on Sakhalin Island, off eastern Siberia, are projected to provide $85 billion in taxes and royalties to Russia by 2050.

Critics say Moscow is pursuing a strategy, coarsely at times, of squeezing maximum value from its vast oil exports, a source of national pride that is rekindling ideas of superpower status. It is asserting state control over the industry at home while trying to buy refineries, gas stations and pipelines in other countries to earn profits from lucrative parts of the energy business.

Oil analysts here say the environmental permit action could be a way to move toward discussions on getting the natural gas monopoly, Gazprom, into the consortium. Talks with Shell on this matter have been stalled for more than a year.

A former Russian legislator who drafted the law that provided the basis for development on Sakhalin — called the production sharing agreements, or P.S.A. — said in a telephone interview Tuesday that the permit withdrawal seemed to be a first step by the government toward a sweeping renegotiation of the deals. Three such agreements are in effect; Exxon Mobil and Total of France are lead operators on the others.

“It’s a strong sign that all the P.S.A. oil fields could be taken and given to the state,” said Konstantin V. Remchukov, the former member of Parliament. “They are dreaming up reasons” to renegotiate, he said.

On Tuesday, the economy minister, German O. Gref, said Russia would not cancel the deals, but he criticized cost overruns at the Shell project. Still, any revision of terms on the projects could have far-reaching consequences by positioning Russian state companies, rather than Western oil producers, as the beneficiaries of the strong energy market in the Pacific Rim.

“Times have changed in Russia,” Oleg V. Mitvol, deputy director of Rosprirodnadzor, the agency that revoked Shell’s license, said at a news conference here. “We want international investment, but we don’t want to be made into a banana republic.”

Britain has not been as blunt in its comments as Japan, but it too protested Russia’s move against Shell, a company that does much of its business from London. A Foreign Office spokesman, Andy McGuffie, said: “We have expressed our concerns to the Russian government at a number of levels. We are deeply concerned.”

Oil analysts said Russia stood to gain large additional profits from Sakhalin II if it forced a renegotiation, perhaps outweighing risks from angering other governments.

Sakhalin is estimated to have 4.5 billion barrels of oil equivalent, and about 2.5 billion of that would be Shell’s. Over all, Shell listed just under 12 billion barrels of proven reserves at the end of 2005, but analysts say it is hard to say how much is from Sakhalin, because the company does not break out those numbers. They say that some, but not all, of Shell’s 2.5 billion barrels would presumably have been booked.

Dan Bilefsky contributed reporting from Brussels and Heather Timmons from London. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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