The Scotsman: Russian watchdog pressures Shell project

MOSCOW (Reuters) – Russia’s environmental watchdog stepped up pressure on the Royal Dutch/Shell-led Sakhalin-2 project, saying on Tuesday it would seek to overturn its own decision to recognise the project as ecologically safe.

The watchdog said in a statement it had asked a Moscow court to recognise that the world’s biggest liquefied natural gas (LNG) project was not complying with ecological rules.

“If the demands of the Rosprirodnadzor suit to cancel the ecological report are satisfied, then work and other activities as part of the Sakhalin-2 project will be forbidden until the receipt of a new ecological report and the elimination of all the breaches of ecological legislation,” the watchdog said.

Sakhalin-2 has faced increasing opposition from Russian authorities but analysts note that it will be tough for the Kremlin to change the terms of the internationally-recognised production sharing agreement.

They also note that increased pressure from Russia comes amid attempts by gas monopoly Gazprom to secure 25 percent in the project.

Adam Landes from Renaissance Capital brokerage said Shell had already agreed to sell a stake to Gazprom and therefore the pressure was unnecessary as it was damaging the country’s investment climate.

“If this pressure is politically motivated and aims at bringing Gazprom into the project I don’t think Shell needs to be convinced in such a way,” he said.

Royal Dutch/Shell has a 55 percent stake as the operator of the project. The other shareholders are Japan’s Mitsui & Co. Ltd. <8031.T> and Mitsubishi Corp <8058.T>.

The watchdog has already ordered the suspension of construction of onshore pipelines and requested criminal charges against a contractor working for the project.

Shell has stopped building two onshore pipelines and says it will restart only after ironing out differences with the Russian authorities. Its Sakhalin LNG plant will have capacity of 9.6 million tonnes a year, the world’s biggest.

Industry analysts say the pressure may cause yet more delays to the first LNG delivery, which was re-scheduled to summer 2008 after Shell was forced to revise its costs estimates for Sakhalin-2 to $20 billion (10.5 billion pounds) from the previous $10 billion.

Building work is already 75 percent complete and more than four fifth of future LNG output is presold to customers such as Japan’s Tokyo Electric <9501.T>.

Sakhalin-2 is already producing over 70,000 barrels of oil per day for around half the year, but plans to more than double that output all year round when its platforms and pipelines are fully up and running.

(Reporting by Guy Faulconbridge and Dmitry Zhdannikov)

(c) Reuters 2006. All rights reserved.

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