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AFP: Obey or be shut down, Russia says

Russian officials warned Sakhalin-2 investors on Friday to comply with environmental laws or face shut-down, also suggesting there could be adjustments to the “economic model” in the huge Pacific coast oil and gas project.

“If the Russian Federation’s laws are going to be violated, if irreparable damage is done to the environment, we will take measures to stop the project,” Natural Resources Minister Yury Trutnev told reporters.

Moscow’s increasingly hard-nosed approach to foreign energy investors has shaken its European partners, while the controversy over Sakhalin-2 is sparking alarm in Japan and South Korea, the main markets for gas shipments meant to start in 2008.

British oil giant Shell and Japanese firms Mitsui and Co and Mitsubishi Corp face allegations of seriously violating environmental regulations at the $20-billion Sakhalin-2 project off Russia’s far eastern Pacific coast.

International environmental groups have backed the Russian government’s claims, but critics accuse Moscow of using the allegations to help state gas company Gazprom muscle in on the deal, amid a general campaign to strengthen state control over Russia’s vast energy resources.

Andrei Dementev, the deputy minister for industry and energy, also hinted at changes to the contract, known as a production sharing agreement, under which Sakhalin-2’s foreign investors operate.

Government ministers and other politicians have criticised PSAs — investment deals that freeze the legal and taxation conditions on a project — as deals concluded by an economically weak Russia in the 1990s and no longer properly serving the country’s interests.

Dementev told Russia’s upper house of parliament, the Federation Council, that negotiations are under way “about the possibility of reviewing the economic model of the (Sakhalin) agreement. However, it is unlikely this would bring about a change in the conditions.”

Three companies currently holding PSAs in Russia — US ExxonMobil, Shell and France’s Total — and Dementev said that Moscow considered the Shell deal “the worst of the three.”

But despite Trutnev’s stern warning, the natural resources minister indicated that compromise was likely with the foreign investors in Sakhalin Energy Investment Company.

“We have moved onto constructive dialogue,” Trutnev said. “The company agrees that it has violated environmental laws.”

Sakhalin Energy confirmed this, announcing in a statement on Friday that it had written to Trutnev promising “commitment to cooperate with the minister for natural resources” and providing an update on “the company’s work to rectify acknowledged non-compliant environmental practices.”

The Sakhalin-2 project includes the construction of an 800-kilometre gas pipeline that runs the length of Sakhalin island, a liquefied natural gas plant, two oil platforms and an oil terminal.

Sakhalin-2 is committed to delivering its first shipments of liquefied natural gas to Japan in 2008.

Shell owns a 55-percent stake, with Mitsui and Mitsubishi holding interests of 25 and 20 percent respectively.

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