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The Wall Street Journal: EU, Japan Object To Russia’s Move On Shell Permit

September 20, 2006; Page A11

Russia’s move to revoke an environmental permit for a $20 billion oil-and-gas project led by Royal Dutch Shell PLC sparked protests from Europe and Japan.

Meanwhile, Russia’s OAO Gazprom said talks aimed at bringing the state-controlled gas monopoly into the giant project on the Far East island of Sakhalin have made no progress since Shell announced costs would double more than a year ago.

Russia’s Ministry of Natural Resources said Monday it was withdrawing its approval for the second phase of the project because of allegations Shell had violated terms of the deal. Shell denies that.

But Russia’s economics minister said the government had no plans to cancel a handful of foreign-led energy projects agreed to in the 1990s, including Sakhalin II.

The move to revoke the permit follows Kremlin efforts to increase Russian control of oil and natural-gas projects and was seen as a tough negotiating tactic aimed at restructuring the agreement between Russia and the project’s operator, in which Shell owns a 55% stake and Japan’s Mitsui & Co. and Mitsubishi Corp. own a combined 45%.

The European Commission, the European Union’s executive body, said it was taking Russia’s withdrawal of the permits “very seriously” and called on Moscow to guarantee a secure and predictable investment climate.

Shinzo Abe, the expected successor to Japanese Prime Minister Junichiro Koizumi, said a major delay to Sakhalin could hurt diplomatic relations, and the British government said it was “deeply concerned.”

Analysts said Russia needs massive amounts of investment to develop its infrastructure and exploration capacities.

Sakhalin II had been scheduled to start producing liquefied natural gas in the middle of 2008, with about 60% delivered to Japan, according to Japanese buyers.

Analysts and an industry insider said they don’t expect a severe impact on liquefied-natural-gas supplies in 2008 to 2009, because Japanese buyers already had expected initial output from the project to be unstable.

But for the longer term, a possible slowdown in investments in energy projects in Russia could be a serious problem, analysts said.

“Japanese companies may think twice about investing in resource projects in Russia,” said Hirofumi Kawachi, an analyst with Mizuho Investors Securities Co.

Analysts said they suspect the Kremlin will ratchet up pressure to the point where Shell would be forced to surrender long-established production deals, negotiated when global oil prices were much lower, to give Russia a bigger slice.

Analysts said Russia also wants to help Gazprom get better terms for a stake in the project. Gazprom had planned to swap 50% in its giant Siberian Zapolyarnoye field against a 25% stake in Sakhalin II. But the plan ran into trouble after Shell announced cost overruns. A Gazprom spokesman denied that the government’s move had influenced Gazprom’s talks with Shell.

Jonathan Stern, a gas specialist at the Oxford Institute for Energy Studies, said companies would continue to invest in Russia because alternatives such as Iran, Venezuela and Nigeria were just as risky, if not more so.

“They will all say they’re going to be discouraged,” he said of Western energy companies. “The question is…’Where are you going to go?’ If you look at the places which are open for investment…it seems to me that you don’t see Russia as more difficult than anywhere else.”

Steven Beharrell, a senior counsel at law firm LeBoeuf, Lamb, Greene & MacRae, said this may prove to be a watershed, with assets coming under much closer Kremlin control.

“I think this is an indication and a warning to anyone wishing to invest in Russian infrastructure that you will do it on national terms and not on any others,” he told a London conference. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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