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AP Worldstream: Russian minister says no plans to cancel foreign energy deals, but criticizes Shell’s cost hikes

By: ALEX NICHOLSON,

Russia’s economics minister said Tuesday the government had no plans to cancel a handful of foreign-led energy projects agreed to in the 1990s, including Shell’s troubled Sakhalin-2 liquefied natural gas project.

But one day after the Natural Resources Ministry said it would cancel environmental approval for the project on the Far East island of Sakhalin, German Gref criticized the ballooning cost of the development, which Shell predicts will reach US$20 billion (A16 billion) _ double the original estimate.

“We can support far from all proposals regarding greater costs. In our opinion some of them are not very well considered. There is room for improvement,” Gref said, according to the ITAR-Tass news agency.

“As far as the existing agreements are concerned, we shall be obliged to ensure their observance,” he said.

The government’s decision to revoke the permit drew harsh criticism from foreign officials. Japan warned that a long delay could damage relations, while the EU suggested that Russia could frighten foreign investors away from its energy sector.

The production sharing agreements, including Sakhalin-2, put Western companies in control of some of Russia’s biggest oil fields at a time when the government was unable to foot the bill for their development. Three _ led by U.S.-based Exxon Mobil Corp., France’s Total SA and Royal Dutch Shell PLC _ remain in effect.

Under the agreements, the government receives a share of the oil once production costs have been covered. Thus, Shell’s July 2005 announcement of rising costs presents a serious delay for the government to see any benefits from the deal.

OAO Gazprom, Russia’s state-controlled natural gas monopoly, said Tuesday that its talks with Shell on acquiring a stake in the project through an asset swap had gone nowhere since the price hike was announced due to “uncertainties” in structuring the deal.

Gazprom is offering Shell access to the far northern Zapolyarnoye-Neocomian field, the world’s fifth-largest gas deposit, in exchange for a 25 percent-plus one share stake in Sakhalin-2.

“There should have been an audit and due diligence _ this couldn’t be conducted due to uncertainty around the economic parameters of the project,” Gazprom spokesman Sergei Kuprianov said Tuesday.

Oil analysts, however, have seen the Natural Resources Ministry’s decision to pull the permit on the grounds that pipeline laying work was harming salmon spawning grounds as a government hardball tactic to force better terms for Gazprom to join the project.

Gazprom dismissed those suggestions as “suppositions.”

“The Natural Resources Ministry’s decision cannot affect negotiations with Shell because they haven’t been progressing for completely different reasons for more than a year,” Kuprianov said.

Much of the liquefied gas from Sakhalin-2 is destined for Japan, which is seeking to reduce its dependence on the Middle East for energy. Japanese companies Mitsui & Co. and Mitsubishi Corp., hold 25 percent and 20 percent stakes, respectively, in the project.

Japanese chief Cabinet Secretary Shinzo Abe said that a long delay caused by the ministry’s move could damage Japan’s relations with Russia, ITAR-Tass reported.

EU Energy Commissioner Andris Piebalgs said Russia should clearly identify the reason for canceling the permit and give the Sakhalin Energy consortium led by Royal Dutch Shell PLC time to resolve the problem “according to defined and clear criteria.”

By suddenly annulling the permit, he said, Russia could scare foreign investors away from its energy sector, which is seen as a key source of new supplies of oil and gas at a time of soaring world demand.

But Oleg Mitvol, the deputy head of the Natural Resources Ministry’s environmental watchdog body, defended the decision to revoke approval.

“Sakhalin Energy got a license to pump oil and gas,” the RIA-Novosti agency quoted him as saying. “No one gave it a license to kill Russian nature.”

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