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Reuters: Kremlin official turns up pressure on Shell

Thu Oct 5, 2006 3:01 AM BST

LONDON (Reuters) – A Kremlin official turned up the pressure on Royal Dutch Shell (RDSa.L: Quote, Profile, Research) over its Sakhalin oil and gas project in an interview with the Times newspaper, published on Thursday.

Russia wants Shell either to keep its original cost agreement, renegotiate the terms of its deal with Moscow or sell up and leave, the newspaper said.

Arkady Dvorkovich, head of the Kremlin’s economic research department, told the Times: “As far as Sakhalin-2 goes, you know which side started changing the terms and who asked for expenditure to be doubled. It was clear … that the Russian side would never agree to this.”

Dvorkovich told a conference in Moscow on Wednesday Russia was particularly concerned by Shell’s request last year to allow it to double costs at the Sakhalin-2 project to 10.6 billion pounds (US$20 billion).

This would reduce Russia’s profits under a product-sharing agreement (PSA).

“If it’s more beneficial to work under the PSA, (Shell) should do that rather than switch to a new legal regime. If neither of those options are acceptable, it may be more beneficial to sell their interests to a third party,” the Kremlin official told the Times.

Russia has stepped up pressure on Sakhalin-2 and the neighbouring Sakhalin-1 project, led by Exxon Mobil (XOM.N: Quote, Profile, Research). Many analysts have said they consider the rising pressure as part of a Kremlin campaign to regain control over the projects by forcing operators to sell out to state controlled firms.

Alexander Medveded, deputy chairman of Gazprom, reiterated the firm was still in talks with Shell over Sakhalin-2.

“We are looking at the original agreement of a 25 percent plus one share stake,” he told the Times, again ruling out the possibility of taking a controlling stake.

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