By Ilya Garger,
Last Update: 3:33 AM ET Sep 19, 2006
HONG KONG (MarketWatch) — A Russian government decision to withdraw environmental approval for the Sakhalin-2 oil and gas project has strained relations with Japan and caused shares in two Japanese firms with stakes in the project to fall.
Japanese cabinet secretary Shinzo Abe, who’s also a candidate to become the country’s next prime minister, said Tuesday that Russia’s move “might have a negative influence on overall Japan-Russia relations” if it causes delays in the project.
Russia said Monday it was pulling the project’s environmental permit, which will force work to halt.
The project is located on Sakhalin Island in the Russian Far East, immediately north of Japan.
The project, led by Royal Dutch Shell is likely to cost $20 billion.
Shell holds a 55% stake, while Japan’s Mitsui & Co. owns 25% and Mitsubishi Corp. owns 20%.
Shell’s London-listed shares advanced on Tuesday, with Shell up 0.8% in early trade.
While the conflict is ostensibly over environmental issues, the Russian government itself has said there are other factors in play.
Russia’s minister of natural resources, Yuri Trutnev, said the decision to withdraw approval was an effort to defend Russia’s interests after Shell doubled the project’s estimated cost from $10 billion.
Since the Russian government is entitled to a share of revenues after the investment has been recouped, the cost overrun would cost it financially.
Officials may also be using the environmental issue as a way of pressuring Shell to allow Russian firms into the project on favorable terms.
Shell has been negotiating with Russia’s Gazprom with a view to giving it a stake in the project.
Ilya Garger is a reporter for MarketWatch based in Hong Kong.
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