Royal Dutch Shell Group .com Rotating Header Image

The New York Times: A Mix of Oil and Environmentalism

Sakhalin Island

(Joseph Sywenkyj for The New York Times
Ships at Korsakov, a port at the southern tip of Sakhalin Island in Russia.)

October 6, 2006

YUZHNO-SAKHALINSK, Russia — For more than a decade, Dmitri V. Lisitsyn waged a lonely, losing battle to protect the local salmon and gray whales from the world’s large oil companies, which are turning bucolic Sakhalin Island into an industrial hub for energy in Asia.

Now, Mr. Lisitsyn suddenly has the full support of an unlikely environmental champion: the Russian government.

The authorities, who had never shown any interest in Mr. Lisitsyn’s environmental causes in the past, have now taken them up as a means to stall giant projects by the oil companies Royal Dutch Shell and Exxon Mobil here on Sakhalin, a placid island near Siberia that is unfathomably rich with oil and gas. But the unusual tie-up is just the latest move in an intensifying face-off between the big oil companies and the Kremlin, which wants to recover — but pay very little — for energy assets it sold to foreigners when oil prices were low.

Unlike Hugo Chávez of Venezuela or Evo Morales of Bolivia, who recently sent in his army to seize natural gas fields, the Kremlin is using more sophisticated methods — though the results are no less insidious from the oil companies’ point of view.

Just now, Exxon Mobil is clashing with the Kremlin over whether it can send out its first tanker exports of crude oil from the $17 billion Sakhalin 1 project. Exports were supposed to start the first week of October, but at a conference on Sept. 28, Russian officials warned that shipments would be halted for health and safety checks. Exxon Mobil insisted the tanker would set off as planned.

The tanker is to take oil from one of the world’s newest energy provinces to Asia; some of the oil will also make its way to California, helping to diversify supply away from the Middle East, a goal of the Bush administration’s energy policy.

[By yesterday, the tanker, Viktor Titov, was still moored to the dock at the De-Kastri terminal on the Tatar Strait in the Russian Far East. Late yesterday evening, Exxon Mobil would say only that the terminal was being tested and needed additional Russian government permits, and would not comment on when the tanker would depart.]

An even bigger target lately is Shell and its $20 billion project, Sakhalin 2, which represents the largest foreign investment in Russia and is the world’s largest combined oil and natural gas development. Authorities have also singled out BP fields in Siberia and a project of the French oil company Total in northern Russia.

Russia is now using environmental regulation, oil analysts say, to weaken the negotiating positions of the country’s largest foreign investors, in the same way it used the tax code to weaken Yukos, once Russia’s largest private oil company. Yukos went bankrupt when the government selectively enforced certain tax rules.

Indeed, since Rosneft, a state-run company, took over Yukos’s oil production, the Kremlin has raised its control over the country’s energy assets, with wide implications for the world oil supply. This summer Russia surpassed Saudi Arabia as the world’s largest oil producer.

“The official rhetoric is getting steadily more shrill and does not bode well for the future of foreign oil companies in Russia,” the director of Goldman Sachs’s Moscow office, Rory MacFarquhar, wrote in a note to investors recently. “We continue to believe that the aim of this campaign is to force the foreign companies to accept Russian state companies as equal or even majority partners in their projects, possibly for no compensation.”

Shell’s project is now in limbo because regulators revoked a permit for Sakhalin 2, a move that threatened to idle 17,000 workers. That revocation was suspended for a second environmental review, scheduled to be completed on Oct. 25, when a new showdown is expected.

Regulators this fall are pressuring all five large Western oil investments in Russia in which the government does not have a controlling stake: Sakhalin 2; Sakhalin 1; BP’s venture, TNK-BP; Total’s Kharyaga field; and the Caspian Pipeline Consortium, which exports Central Asian oil across Russian territory.

Even Nezavisimaya Gazeta in Moscow noted this summer in an article it was “open season” on foreign energy investment.

[On Wednesday, Anthony Brenton, Britain’s ambassador to Russia, called the actions “a serious blow to Russia’s reputation as a business partner and supplier of energy resources.”]

In a choreographed show of official outrage over the environment unusual for Russia’s government, Oleg L. Mitvol, deputy director of the environmental watchdog agency Rosprirodnadzor, recently led journalists, diplomats and conservationists in a tour of Shell’s project.

On the tour, Mr. Mitvol pointed angrily at a muddy hillside on Shell’s pipeline route. Pointing out upturned trees, he said he suspected pollution was behind the deaths of two fish he found belly-up in a stream, and he described how divers had shown him what he called a “mutant,” a starfish with three arms instead of the usual five. At one point, as an aide casually flicked a cigarette butt into the Pacific Ocean, Mr. Mitvol stood on a fishing pier and denounced Shell’s intrusion in Aniva Bay.

He said Shell’s operating company, Sakhalin Energy, was allowing erosion into salmon streams. He also accused the company of illegally dumping dredge material into a bay and cutting down trees in a park.

“We signed a deal with the company to drill for oil and gas,” Mr. Mitvol said. “Cutting trees in a nature preserve is something else, excuse me.”

Mr. Mitvol, interviewed in a muddy field beside a pipeline, said Shell could face as much as $50 billion in fines and fees if it wanted to remain in Russia. He later said the figure was a rough estimate. He also threatened to “open a criminal case for every tree they cut down. “

Greenpeace, the International Fund for Animal Welfare, and Sakhalin Environment Watch — Mr. Lisitsyn’s group — support Mr. Mitvol’s allegations, which they say echo complaints they have raised for years with little response from the government, until now.

Sakhalin Energy denied the claims made by Mr. Mitvol. “Although the project has faced significant environmental challenges, the company firmly believes that these have been fully addressed,” the company said in a statement. Analysts say the regulatory complaints are a thinly veiled effort to renegotiate billions of dollars in contracts dating from the 1990’s. “You don’t fight city hall, and you certainly don’t fight the Kremlin,” Christopher Weafer, chief analyst at Alfa Bank, said.

It was a decade ago that Russia first negotiated the production-sharing agreements that govern the oil projects on Sakhalin with Shell and Exxon. At that time, oil prices were hovering around $15 a barrel. Under those agreements, the government does not tax the companies; instead, the government gets a share of the oil, but only after the operators recoup their initial investments.

During the past year, Shell doubled its cost estimate to $20 billion and Exxon Mobil raised its estimate by 30 percent, to $17 billion, citing higher prices for steel and an appreciation of the ruble. In both cases, the new cost estimates push back by years the government’s profits. Not surprisingly, the government has rejected these estimates — hence the conflict.

[“It was clear Russia would never agree to this,” President Vladimir V. Putin’s chief economic adviser, Arkady Dvorkovich, said Wednesday concerning the new estimate for Sakhalin 2.]

Meanwhile, the Russian company Gazprom is negotiating to buy 25 percent of Shell’s project, but those talks have not gone well. Shell announced the cost increase only in July 2005, just a week after signing a preliminary asset swap agreement with Gazprom.

Gazprom, which is seeking a monopoly on natural gas exports from Russia to Asia, wanted a veto on the board, with a voice in decisions about markets, pricing and strategy. Under a previous charter for Shell’s operating company, the 25 percent stake, plus one share, would have given Gazprom a say in these decisions.

But just days before the deal was signed in July, Shell and its Japanese partners, Mitsubishi and Mitsui, changed the charter, raising the percentage of stock required for a veto, according to a lawyer who has seen the documents. Gazprom was not informed of the change before the signing, angering the powerful company.

“That just wound them up,” said the lawyer, who did not want to be identified because he was not authorized to discuss the deal publicly.

[Top executives from Shell, Mitsui and Mitsubishi were scheduled to meet in London this week to decide on a response, Reuters reported Tuesday.]

Separately, regulators are investigating the $17 billion Exxon Mobil project on Sakhalin — with a visit by Mr. Mitvol to the De-Kastri terminal scheduled for Monday — and threatened to revoke the license for an $18 billion gas field in Siberia being developed by BP’s Russian joint venture, TNK-BP, citing environmental shortfalls.

“The environmental weapon, in this sense, allows the Russian authorities to put pressure on the operators and at the same time to defend a noble cause,” said Vitaly V. Yermakov, research director for Russian and Caspian energy at Cambridge Energy Research Associates. “In chess, every good move should be both offensive and defensive. Russians are very good chess players.” and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

Comments are closed.

%d bloggers like this: