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The Associated Press/MOSCOW: Russian wants (Sakhalin-2) pipe-laying project halted

By ALEX NICHOLSON
AP Business Writer
 
AUG. 3 6:34 A.M. ET Russia’s natural resources ministry on Thursday called for the suspension of pipe-laying work at a giant oil and liquefied natural gas project led by Shell on the far eastern island of Sakhalin, citing fears of mudslides.

The statement on the ministry’s Web site came as it began a monthlong audit of Sakhalin-2, where negotiations have stalled on the acquisition of a stake in the project by state-run natural gas monopoly OAO Gazprom as the Kremlin ratchets up its control of the energy sector.

The ministry said it had received a report from the far eastern branch of the Russian Academy of Sciences that found that pipeline was in danger of being damaged by mudslides where it meets the coast and traverses the hundreds of rivers and streams that cross the island.

Oleg Mitvol, a deputy head of the ministry’s environmental watchdog division, said that the dangers had arisen due to “unqualified design solutions” implemented by Sakhalin Energy, the consortium led by Royal Dutch Shell PLC.

Twenty kilometers (about 12.5 miles) of pipeline are exposed to risk, according to the report. The ministry added that documents provided by Sakhalin Energy “give no indication of how to solve the problem of the pipeline’s safety in the majority of areas at risk.”

Spokespeople for Sakhalin Energy were not immediately available for comment. The Sakhalin Energy Web site, however, acknowledges that erosion at the points where pipelines cross rivers was a concern and reports and photographs detail the company’s efforts to stop sediment entering 183 rivers that are classed as sensitive for salmon spawning along the pipeline route.

Sakhalin-2 is one of two projects in Russia’s Pacific offshore being developed by Western oil companies under production-sharing agreements signed in the early 1990s.

In its statement, the ministry repeated criticism that delays and cost overruns at Sakhalin-2 are harming national interests by pushing back the date when the state will receive revenues from the project to 2014 at the earliest.

“This has a negative impact on the interests of the Russian Federation,” Mitvol said.

In July last year, Shell said the expected cost of developing Sakhalin-2 — which is overwhelmingly dedicated to producing liquefied natural gas — had doubled to around US$20 billion (euro16 billion).

The oil company blamed currency swings and rising prices of commodities, such as steel, for driving up the cost of the project.

Analysts have suggested that the Ministry’s attention to Sakhalin-2 appeared to be a way of putting pressure on Sakhalin Energy to give ground in negotiations with Gazprom.

Sakhalin Energy is negotiating with Gazprom to swap a 25 percent-plus one share stake in the Sakhalin-2 project for access to the Zapolyarnoye-Neocomian field, the world’s fifth-largest gas deposit, located in far northern Russia.

But Gazprom argues that the cost increase has diminished the value of the stake it wants to take and wants to reduce the assets it is offering in the swap deal.

Earlier this week, a statement from the Natural Resources Ministry helped send oil prices higher when it declared a leak on Russia’s main export pipeline to be an “environmental catastrophe.”

The pipeline’s operator, however, said the spill was far smaller than claimed and had already been cleaned up. The ministry later issued a statement saying the accident was not deemed a catastrophe by experts.

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