Bloomberg: Russia Raps Exxon, Shell for Environmental Breaches (Update4)

By Christian Schmollinger and Shigeru Sato

Sept. 20 (Bloomberg) — Russia’s government denounced projects led by Exxon Mobil Corp. and Royal Dutch Shell Plc for breaching environmental rules, as President Vladimir Putin seeks tighter control of the oil and gas industry.

Exxon’s Sakhalin-1 venture failed to complete safety measures at De Kastri, a Far East export terminal, while Shell’s Sakhalin-2 project may be charged with destruction of forests, a criminal offence, officials in Russia’s Ministry of Natural Resources and industrial safety inspectorate said.

The government is stepping up pressure on three Sakhalin Island projects in Russia’s Far East operated by Shell, Exxon and Total SA under production-sharing agreements that grant the state a share of oil after the investors recover costs. The ventures created in the 1990s lured investors from Japan, including the government of Asia’s biggest economy.

“Moscow’s recent moves could become one of the major deterrents to foreign investment in Russian energy and manufacturing,” said Hirofumi Kawachi, an energy analyst at Mizuho Investors Securities Co. in Tokyo.

Shell’s Sakhalin-2 venture has failed to resolve half of its 60 environmental breaches, Alexander Losyukov, Russia’s ambassador to Japan told reporters in Tokyo today. Still, Russia’s government won’t cancel the project as the facility is “vital” for the country’s oil and gas exports for the next 15 years, he said.

The construction of a pipeline by Shell-led Sakhalin Energy across Sakhalin Island caused at least 11 million rubles ($410,000) of damage to the forests, Oleg Mitvol, the deputy head of the Natural Resources Ministry’s environmental inspectorate, said at a press conference in Moscow yesterday.

Criminal Cases

“First, I think there will be criminal cases opened for destruction of the forest,” Mitvol said. “Then we’ll look at all other issues.”

BP Plc’s Russian venture also faces the suspension of a license, the Financial Times reported today, citing an unidentified person familiar with the matter. Prosecutors want the license for the Kovykta gas field in eastern Siberia suspended, the paper said. TNK-BP spokesman Alexander Shadrin declined to comment on the report.

A halt in Sakhalin-2 could delay Shell’s deliveries of 9.6 million tons a year of liquefied natural gas to Japan and Korea, scheduled to start in 2008. Putin’s presidency this year of the Group of Eight nations is focusing on energy security.

Two Weeks to Go

Valentina Kiseleva, an employee in the external affairs office of Sakhalin Energy, said today she wasn’t aware of any charges, directing questions to a spokesman in Moscow.

Exxon’s Sakhalin-1 project is scheduled to begin exports later this month from its terminal at De Kastri on the Russian mainland. The facility will load 250,000 barrels a day of oil and store 1.3 million barrels in two tanks. Ships will leave the terminal every three to four days. The venture may cost $17 billion, 33 percent more than the previous estimate because of rising steel prices, inflation and currency fluctuations, Irving, Texas-based Exxon said Sept. 18.

“There is a little more than two weeks to go before the terminal’s announced opening, however the American partners have not yet fully completed environmental safety measures,” Alexander Poleshchuka, Far East head at Rostekhnadzor, Russia’s industrial safety inspectorate, said in a Sept. 18 statement. “Playing around with oil is dangerous.”

The statement from the Rostekhnadzor “doesn’t seem to reflect the nature of our conversations with them,” said Michael Allen, a spokesman for Exxon’s unit Exxon Neftegas Ltd. in Yuzhno-Sakhalinsk. “We’ve had about 40 different inspections over the past year at the terminal and the Sakhalin project.”

Japan’s Needs

Russia’s industrial safety inspectorate is expected to authorize by tomorrow a Natural Resources Ministry order canceling a key Sakhalin-2 permit, Rinat Gizatulin, a spokesman for Russia’s Natural Resources Ministry, said yesterday. Sakhalin Energy may wait more than six months for a decision on a new license, he said earlier.

Japan, which imports more than 99 percent of its oil and gas, is relying on Sakhalin-2 to start contributing about 8 percent of the gas needs in Asia’s biggest economy by 2008, reducing a reliance on Middle East imports. The project is 45 percent-owned by Mitsubishi Corp. and Mitsui & Co., Japan’s two biggest trading companies. Royal Dutch Shell Plc owns the rest.

Diplomatic Relations

Russia’s decision to suspend the project may impact the credit standing for Mitsui and Mitsubishi, said Standard & Poor’s, the credit rating company, in a note today.

Russia’s suspension of Sakhalin-2 may hurt relations between the countries, Japan’s Chief Cabinet Secretary Shinzo Abe said yesterday.

State-run OAO Gazprom’s talks with Shell for a stake in the Sakhalin-2 venture, the biggest fully foreign-owned energy project in Russia, broke down last year after Shell doubled its estimated project costs.

Environmental concern is the ministry’s only interest in taking away the permit and stopping Shell’s project, known as Sakhalin-2, Mitvol said.

“Shell received permission to extract oil and gas, not to kill the environment,” he said.

Sakhalin-1 Partners

The Sakhalin-1 project will raise production fivefold to 250,000 barrels a day this year. The project’s three offshore fields — Chayvo, Odoptu, and Arkutun Dagi — have recoverable reserves totaling 2.3 billion barrels. Oil from Sakhalin-1 will meet about 6 percent of Japan’s daily needs.

Sakhalin-1’s partners are Exxon Neftegas, Japan’s Sakhalin Oil & Gas Development, two affiliates of OAO Rosneft and ONGC Videsh Ltd., a unit of India’s state-owned explorer. Sakhalin Oil & Gas Development is a Japanese joint venture, 50 percent owned by the government. Itochu Corp. and its unit own 18.12 percent. Japan Petroleum Exploration Co. has 14.46 percent and Marubeni Corp. 11.68 percent.

Inpex Holdings Inc., Japan’s largest oil and gas exploration company, holds a 5.75 percent stake, and plans to buy additional shares from the Japanese government and increase its shareholding to 33 percent.

Showa Shell Sekiyu K.K., Shell’s Japanese refining unit, today said it bought a cargo of crude oil from Sakhalin-1 for the first time. Showa Shell bought 700,000 barrels of the light, low-sulfur Sokol oil from Japan Petroleum Exploration.

In August, Nippon Oil Corp., Japan’s largest refiner, agreed to buy a cargo of the same size from Sakhalin-1 to diversify its supply sources and benefit from lower shipping costs compared with importing similar low-sulfur oil varieties from Southeast Asia and West Africa. Japan relies on the Middle East for 90 percent of its oil.

To contact the reporter on this story: Christian Schmollinger in Singapore at [email protected] or; Torrey Clark in Moscow at [email protected] .

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