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AFX News: EBRD delays decision on Sakhalin-2 while situation remains unclear

26 September 2006

LONDON (AFX) – The European Bank for Reconstruction and Development, which should have given its decision on financing for the Shell-led Sakhalin-2 oil and gas project this summer, said that it would delay its decision while the Russian legal position remained unclear.

Current uncertainty over the project ‘does not allow the EBRD to progress’ over the matter, a spokeswoman for the bank told AFP.

Russia has threatened to halt the Sakhalin-2 oil and gas development project off Russia’s Pacific coast unless the Anglo-Dutch group Shell corrected environmental damage done to the site.

The London-based EBRD had promised a decision over financing by September — with the bank looking to invest up to 400 mln eur (507 mln usd) in a project that is set to cost a total of 20 billion dollars.

But earlier this month, Russia cancelled an essential permit for the Shell-led consortium to develop the huge Sakhalin-2 oil and gas fields, as a top official warned foreign energy companies may lose their licenses.

Russian activists claim the Sakhalin project threatens precious species such as the western grey whale, which has its summer feeding ground in the area, as well as salmon that use the island’s waterways for spawning.

The Shell-led consortium, Sakhalin Energy, has asked the EBRD for financing for the second phase of Sakhalin II, after it borrowed funds for phase one in 1997.

Located on the island of Sakhalin, 40 kilometres (25 miles) from Japan’s coast, the second phase would expand existing facilities and lay pipelines that would supply a liquefied natural gas plant under construction, as well as an oil export terminal in the south of the island.

Sakhalin II is key to the development plans of Anglo-Dutch giant Royal Dutch Shell. It is estimated that 1.0 billion barrels of oil can be recovered as well as 500 billion cubic meters of gas.

Shell has a 55-percent stake in the Sakhalin Energy Investment Company while Japanese firms Mitsui and Mitsubishi own 25 percent and 20 percent respectively.

But Shell has signed a memorandum of understanding with Russian gas giant Gazprom to swap 25 percent of shares for half of a Siberian field.

Founded in 1991 to assist the transition of former communist nations to market economies, the EBRD operates in 27 countries from central Europe to Central Asia, including Uzbekistan.

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