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Reuters: Russia threatens Shell with sanctions over Sakhalin

Mon Oct 16, 2006 7:00 AM ET
By Douglas Busvine

MOSCOW (Reuters) – Russia threatened Royal Dutch Shell on Monday with the full armoury of sanctions at its disposal if it fails to address environmental violations at its Sakhalin-2 project, which has run far over budget.

But, Resources Minister Yuri Trutnev said, Shell had no reason to fear for the future of the vast oil and gas project if it tackles a catalog of environmental concerns raised by Russian officials.

“If the company presents an exhaustive plan to remove environmental damage … then it is completely obvious that there will be no point in stopping the project,” Trutnev told reporters on the fringes of a meeting with foreign investors.

“If such measures are not proposed, then absolutely any sanctions are possible from our side.”

Shell is developing fields off the coast of the Pacific island of Sakhalin and building one of the world’s largest liquefied natural gas (LNG) plants. The project is due to start supplying Asian and U.S. customers from mid-2008.

Sakhalin-2 has come under pressure from the Kremlin over ecological and technical issues which analysts say are part of a broader Kremlin campaign to limit foreign involvement in the strategic energy sector.


Shell’s chief executive Jeroen van der Veer told the Foreign Investment Advisory Council, chaired by Prime Minister Mikhail Fradkov, that Shell had answered Russia’s ecological concerns.

“Although the project has faced significant environmental challenges, we firmly believe these have been fully and transparently addressed,” said Van der Veer.

“We are confident that all remaining issues can be resolved through our ongoing, constructive and fair dialogue with the Russian government.”

Sakhalin-2 is one of the most challenging energy projects in the world. Its oil and gas fields lie in the stormy, icy waters of the Sea of Okhotsk, while pipelines between the fields and the LNG plant cross seismically active zones.

Russia clinched a production sharing agreement with Shell over 10 years ago, when it was desperate to attract foreign investment at a time of low oil prices. Shell’s partners in the project are Japan’s Mitsui and Mitsubishi.

Now, with cost overruns doubling the Sakhalin-2 price tag to over $20 billion, Russia is unhappy that it will have to wait longer for its share of profits. The Kremlin is pushing for a better deal.


Trutnev, who is due to visit Sakhalin later this month, said it was premature to discuss the scale of sanctions that might be leveled against Sakhalin-2’s operators.

But, after meeting Van der Veer, he praised Shell for taking a more constructive approach on Russia’s environmental concerns than has been the case to date.

“My meeting today with Van der Veer represents a 180-degree about-turn,” Trutnev said. “He talked about existing violations, about ecological standards and how they have already started improving the situation.”

Trutnev also served notice that other oil majors can expect closer scrutiny as Russia prioritizes the environment.

“We will continue to raise our demands concerning protection of the environment — that means LUKOIL, Rosneft, Shell and all companies,” he said. “Maybe we started a little late, and did not proceed as systematically as we might have wanted.”

Russia’s gas export monopoly Gazprom agreed in principle last year to acquire a 25 percent stake in Sakhalin-2 in exchange for ceding to Shell a stake in its big gas field in West Siberia.

The cost rise put talks on the swap on hold, but Van der Veer said: “We welcome the proposed entry of Gazprom into the Sakhalin-2 project and hope to build on that in the near future.” and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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