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AFX Europe (Focus): Shell-led Sakhalin consortium warns Russia on environmental permit

Published: Sep 22, 2006

MOSCOW (XFN-ASIA) – A Shell-led consortium developing the Sakhalin-2 energy project warned that the Russian government’s move to retract an environment permit would cause “irreparable damage.”

The move “would lead to a significant delay in the project, extra costs and irreparable damage to the reputation of this venture, the Sakhalin region and the Russian Federation as a whole for failure to deliver gas to buyers,” Sakhalin Energy said in a statement.

“Profit sharing” with Russia would also be delayed, it added.

On Monday, Russia’s natural resources ministry said it had revoked a 2003 State Environmental Expert Review (SEER), adding that this would halt work on construction of natural gas infrastructure at Sakhalin-2.

The announcement provoked a wave of criticism and concern worldwide this week, including from Japanese officials and the European Commission.

But a Sakhalin Energy spokesman said Wednesday that work was continuing as normal.

“As we haven’t been served any official notice, the construction continues as planned,” said the spokesman, Ivan Chernyakhovsky.

The project, located on an island in Russia’s Far East, has attracted controversy because it falls under a production sharing agreement (PSA) concluded on what officials say were highly unfavorable terms for Russia.

Sakhalin Energy has agreed to deliveries of liquefied natural gas starting from 2008 to energy companies in Japan, which is trying to diversify supplies away from the Middle East.

Under the PSA, Russia receives a share in the profits from Sakhalin-2 on a gradually increasing scale only after the companies involved have recouped their initial investments and reached a certain level of profit.

Sakhalin Energy is 55 pct owned by Shell. Japanese firms Mitsui and Co and Mitsubishi Corp hold 25 pct and 20 pct in the project, respectively.

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