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Reuters: Shell Awaits More Sakhalin Environment Claims

RUSSIA: October 18, 2006

MOSCOW – Royal Dutch Shell said on Tuesday that Russian officials may hit its US$20 billion Sakhalin-2 oil and gas project with a slew of new environmental claims just as it resolves a list of existing complaints. 

Chris Finlayson, head of Shell in Russia, said the company had dealt with 97 percent of the alleged breaches found by an environmental audit conducted in mid-September and hoped to have resolved all of them by the end of the week.

“We are confident that we see a way forward to resolve the issues,” Finlayson told Reuters.

But another audit is under way and its conclusions are likely to be presented during an inspection of Sakhalin-2 by Natural Resources Minister Yuri Trutnev on Oct. 24-26.

A Shell spokesman said this could lead to a new set of requirements. “We don’t know how many prescriptions we will get from the new audit. We don’t know what’s in it,” he said.

Russia has threatened Shell with the full armoury of sanctions at its disposal if it fails to address environmental violations at Sakhalin-2, the world’s biggest liquefied natural gas project and Russia’s top foreign investment.

Trutnev has said the concerns include deforestation and damage to the sea around the Pacific island of Sakhalin, as well as sand clogging river beds and the potential for pipeline damage in an area prone to mudslides.

Russia had already attracted international criticism over its assault on Sakhalin-2, widely seen as an attempt to force Shell and its partners Mitsui and Mitsubishi to concede to less favourable terms and to limit foreign involvement in Russia’s strategic energy sector.


Analysts say the Shell-led venture, which is to start supplying Asian and US customers from mid-2008, has infuriated the Kremlin by doubling its cost estimate to over US$20 billion, and Trutnev has said that his displeasure over the rising costs triggered the campaign of environmental checks.

Sakhalin-2 is a production sharing agreement under which Shell can recoup costs from revenues before paying anything to the Russian state. With cost overruns doubling the price tag, Russia will have to wait longer for its share of profits.

Trutnev said on Monday that Shell, which has already moved Sakhalin-2’s pipeline route to avoid harming whales, had no reason to fear for the project’s future if it tackled environmental concerns.

However, Oleg Mitvol, Russia’s most vocal environmental official, who is deputy head of Trutnev’s ministry’s ecological watchdog RosPrirodNadzor, has asked the courts to annul environmental approvals the ministry gave to Sakhalin-2 in 2003.

A Moscow court refused to rule on the case at a closed hearing on Tuesday, saying he had no right to dispute an internal ministry decision. An official from RosPrirodNadzor said the agency will appeal to the Moscow City court.

Mitvol has vowed to investigate every big oil firm in Russia and has already launched inspections of oil fields and pipelines run by Russia’s biggest oil producer LUKOIL.

Analysts say these wider checks, embracing Russian-owned companies, may be a fig leaf to disguise a Kremlin attempt to target a few foreign ventures, such as Sakhalin-2.

The cost overruns have also angered Russian gas company Gazprom, which aims to take a stake in Sakhalin-2.

Talks between Shell and Gazprom have stumbled over the cost issue but Finlayson said talks were going well and he hoped for a budget agreement with the government by the end of the year. 

Story by Tanya Mosolova 

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