Financial Times: Moscow denies political motive for cancelling gas permit

By Neil Buckley in Moscow
Published: September 20 2006 03:00 | Last updated: September 20 2006 03:00

Russia insisted yesterday that attempts to cancel a key permit for the Royal Dutch Shell-led Sakhalin-2 natural gas project were motivated entirely by serious environmental violations and had no underlying political motive.

Oleg Mitvol, deputy head of Russia’s state environmental watchdog, vowed to keep up the pressure on Sakhalin Energy, the Shell-led consortium that is developing the project, with further lawsuits and environmental checks.

“Sakhalin Energy received permission to exploit oil and gas, no one gave it permission to kill nature,” he said.

Mr Mitvol’s watchdog was behind moves that led to Russia’s natural resources ministry cancelling the environmental permit it gave in 2003 to phase two of the Sakhalin-2 project. The ministry’s decision must be approved by a Russian agency responsible for environmental and industrial safety, but ministry officials said yesterday they expected this to happen within days.

Mr Mitvol did not know what the legal implications would be if the agency did not approve the decision.

Accompanied by representatives of environmental groups, Mr Mitvol alleged that the Sakhalin-2 project was endangering the rare grey whale, polluting the marine environment around Sakhalin Island in the Pacific, and damaging rivers vital for salmon spawning.

He said the Russian environmental watchdog had found conclusions in the environmental impact study that led to the 2003 permit being issued that could not be supported by fact.

Environmental campaigners welcomed what they said was long-overdue action by the Russian authorities.

“Everything that is taking place now is in strict accordance with the law,” said Igor Chertin director of the World Wide Fund for Nature in Russia.

Mr Mitvol rebuffed suggestions that the authorities’ actions were motivated by attempts to secure a stake in the project for Gazprom, the Russian natural gas monopoly, on favourable terms.

“Perhaps we should talk about what percentage of the project Greenpeace, the International Fund for Animal Welfare or the WWF are trying to get,” he said.

“We are not against foreign investment,” Mr Mitvol added. “We are against attempts to make Russia look like a banana republic.”

But analysts continued to speculate that the environmental pressure was wrapped up with the Kremlin’s attempts to increase the role of the state in Russian energy projects.

“The project operators now face substantial discussions with the government, which may result in concessions to the state and the state-controlled energy companies Gazprom and Rosneft,” said Deutsche UFG in a research note.

Gazprom agreed last year on an asset swap with Shell, which would see Gazprom taking 25 per cent of the Sakhalin-2 project, and Shell’s stake falling from 55 to 30 per cent.

But the talks were complicated by a subsequent doubling of the estimated costs of the project to $20bn (£11.6bn, €16.8bn).

The natural gas monopoly said yesterday that talks with Shell had progressed little in the past year.

The tough stance of Russia’s natural resources ministry on Sakhalin-2 and two other production-sharing agreements (PSAs) has previously been criticised by more liberal arms of government such as the economics ministry. PSAs, signed during Russia’s transition to capitalism in the 1990s, are outside the country’s usual tax regime, with the government instead getting a share of the oil and gas production once investors have recouped their costs.

German Gref, economy minister, criticised the ballooning costs of PSAs, which he described as outdated, but said existing agreements should be honoured.

Copyright The Financial Times Limited 2006

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