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MosNews (Russia): Sakhalin-2 LNG Project Under Fire From Environmentalists, Lenders

MosNews (Russia): Sakhalin-2 LNG Project Under Fire From Environmentalists, Lenders

Thursday 28 July 2005

Sakhalin Energy, the operator of the Sakhalin-2 oil and gas project, was compelled to suspend the construction of a liquefied natural gas (LNG) plant because of strong protests from environmentalists.

The information was reported on Wednesday, July 27, by Russian Nezavisimaya Gazeta (Independent Gazette) daily, which quoted analysts as saying that environmental concerns are being used as an instrument in the tough battle for Sakhalin’s vast natural resources.

The Sakhalin Regional Court overruled the State Ecological Expert Commission’s approval to construct a quay in the Aniva Bay. The court’s decision could lead to a revision of not only the investment component of the project, but also of the timeline for the pipeline’s commencement, with 2008 being the deadline. Such a situation cannot satisfy the investors (Royal Dutch/Shell owns 55%, Sakhalin Holdings B.V., a subsidiary of Japane’s Mitsui, owns 25% and Diamond Electric Sakhalin B.V., a subsidiary of Mitsubishi, has 20%) because the greater part of the project’s resources are included in contracts.

Shell has recently signed an asset swap memorandum with the Russian natural gas monopoly Gazprom. The international oil major wants to exchange a stake in Sakhalin-2 (25% plus one share) for the right to take part in the development of a deposit in Western Siberia. This move by the British-Dutch company may be motivated by a wish to secure support by a major Russian state-run concern, considering that problems associated with the project occasionally crop up. According to the Japanese media, it is highly probable that Mitsui and Mitsubishi will take similar actions. However, Gazprom has already made it clear that its support will cost the partners a hefty price.

Analysts, quoted by the Russian paper, also said that the rivalry among the numerous Sakhalin projects may also be a cause of “environmental problems” experienced by the Sakhalin-2 project. U.S. capital has a big share in the Sakhalin-1 project and, since the export of oil and gas to the countries of the Asia-Pacific region is envisaged in both projects, the United States may not want Sakhalin-2 resources making it to the rival markets of Japan, Korea and especially China.

Meanwhile, environmental issues are not the only problem that hinders the development of Sakhalin-2. Or, rather, environmental issues have created additional problems for the project. Kyodo News reported on Thursday, July 28, that the European Bank for Reconstruction and Development has decided against giving Sakhalin Energy a loan necessary for the construction of an export gas pipeline. The decision not to provide the loan was made because the bank is worried about the unsatisfactory level of environmental protection measures. The delay in crediting may force the operators of Sakhalin-2 to delay their deliveries of liquefied natural gas by at least 18 months.

Sources at Mitsubishi confirmed to the Itar-Tass agency, that EBRD is examining the situation and that the issue of rendering the loan is still being “considered”.

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