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The Times: Putin takes hard line on Shell Sakhalin dispute… ominious twist last night

September 28, 2006
From Tony Halpin in Moscow
 
RUSSIA’S dispute with Shell over the future of the Sakhalin-2 project took an ominous twist last night when President Putin demanded government action against companies that break licensing agreements.

Mr Putin, in a televised meeting with Yuri Trutnev, the Natural Resources Minister, said: “I am counting on the Ministry and the Government as a whole making these decisions, including with regard to those companies that work in bad faith and don’t fulfil licensing agreements.” 
 
The President’s statement appeared to undermine an earlier attempt by Sergei Lavrov, the Foreign Minister, to soothe Western concerns about investigations into the operations of foreign oil companies in Russia.

Shell’s project has been accused of breaking environmental regulations and Moscow revoked a key permit last week, which threatens to halt operations. Analysts say that the Government wants to make life difficult for the Anglo-Dutch company to force it to offer a larger share of the project to Gazprom, the state-owned gas monopoly. Shell infuriated Russia last year by declaring that costs for the oil and gas project had doubled to $20 billion (£10.6 billion). Under a production sharing agreement (PSA), Shell can recoup its costs before having to split profits from Sakhalin-2 with the Government.

Mr Lavrov told the Sakhalin oil and gas conference that the Kremlin had no desire to scrap the contract with Shell. He said: “Assertions about ‘revisions’ of PSAs, and especially about squeezing foreigners out of the Russian energy sector, have absolutely no basis whatsoever. Carrying out checks in no way means that licences for developing deposits within the Sakhalin-2 project will be withdrawn.”

Even as Mr Lavrov spoke, however, officials from Russia’s environmental agency began a month-long inspection of the facility. Oleg Mitvol, the man leading the inquiry, claimed that Shell might have caused damage costing $50 billion. “If we calculate the cost of clean-up works in the Aniva Bay, the figures will look bad for Sakhalin-2,” a news agency quoted Mr Mitvol as saying.

The inspector was joined by experts from WWF International, the conservation group, which repeatedly has given warning that Shell’s offshore platforms were threatening the breeding areas of gray whales and that pipeline river crossings were damaging salmon migration routes.

Ian Craig, chief executive of Sakhalin Energy, which operates Sakhalin-2, told the same conference that environmental protection issues had been “fully and transparently addressed”. He insisted that the company had met “the highest Russian and international environmental and social standards”.

Mr Craig announced that 98 per cent of the project’s gas had been pre-sold for more than 20 years, making clear that costs would rise still further if the project suffered any delay.

Mr Trutnev said on Tuesday that Sakhalin-2 would be halted unless environmental guarantees were provided over the pipeline being laid as part of the project.

Sakhalin-2 is the largest privately funded energy venture in the world. Shell owns 55 per cent, with the rest shared by the Japanese companies Mitsui and Mitsubishi. Gazprom has been in talks to buy a 25 per cent stake.

The fight for Russia’s riches

Last week Russia threatened to sink flagship foreign projects, cancelling environmental approval for Sakhalin-2, the LNG production-sharing agreement led by Shell.

It then threatened Total and TNK BP, a BP subsidiary, with warnings that permits for projects in Siberia may be withdrawn on environmental grounds . Days later the Natural Resources Ministry said that it would not accept a revised cost estimate for Exxon’s Sakhalin-1 project.

In January Russia cut gas to Ukraine after the Government there refused to agree to a 400 per cent price rise.
 
http://business.timesonline.co.uk/article/0,,9072-2378440,00.html

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