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The Moscow Times: $10Bln Behind Oil Difficulties

Wednesday, September 13, 2006. Issue 3496. Page 4.

By Miriam Elder
Staff Writer

Natural Resources Minister Yury Trutnev acknowledged Tuesday that financial concerns were driving the government’s attempt to revoke approval for Sakhalin-2, a $20 billion oil project led by Royal Dutch Shell.

The government was forced to act because it will lose $10 billion if the project goes ahead, Trutnev said.

It cannot accept “the operator’s plans to write off additional expenditures and to push back the time of production sharing,” he said.

The ministry filed a lawsuit last week to revoke approval of the project, off the Pacific island of Sakhalin, citing environmental violations such as failure to adopt appropriate anti-erosion techniques. The Shell-led consortium, known as Sakhalin Energy and including Japanese investors Mitsui and Mitsubishi, has been forced to shut down pipeline construction at two sites following complaints from the ministry.

Sakhalin-2 has faced delays and cost overruns, with Shell announcing last year that the estimated cost of what will be the world’s largest natural liquefied gas project had doubled to $20 billion. That, in turn, meant it would take twice as long for the state to start collecting profits from Sakhalin’s oil and gas exports, as had been stipulated in a production-sharing agreement with the consortium.

The government has been putting pressure on Sakhalin Energy as the group continues negotiations with Gazprom, the state-run natural gas monopoly. Gazprom is seeking a 25 percent stake in the project in return for an asset swap with Shell, which would get 50 percent of the smaller Zapolyarnoye field in west Siberia.

The government has also been struggling with ExxonMobil over the company’s rights to develop newly discovered reserves around existing deposits in the Sakhalin-1 project, which it leads. Russia insists it should be able to auction off rights to the sites, while Exxon lays claim to the sites under a 10-year-old accord to develop the region.

Trutnev attempted to assuage investor fears, saying the state “is simply obliged to defend its interests.”

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