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Dow Jones Newswires: Sakhalin II Woes May Have Knock-on Effect On Loan-Sources

Wednesday September 20th, 2006 / 17h20 
 
LONDON -(Dow Jones)- Royal Dutch Shell PLC’s (RDSB.LN) environmental and contractual issues with the Russian government on the Sakhalin II project could trigger a knock-on effect on talks to get a $500 million loan from the European Bank for Reconstruction and Development, or EBRD, people familiar with the matter said.

Approval for the estimated $500 million EBRD loan is itself tied to a larger $5 billion project financing effort.

Tuesday, the Russian Ministry of Natural Resources pulled a key environmental permit for the second phase of a Far Eastern oil and gas project. An EBRD spokesman said earlier this week that should the permit not be reinstated, the bank wouldn’t be able to approve the loan.

As a result, the bank, which is expected to reach a final decision in October, now will have to wait for a clarification of the permit’s future status.

But even if this hurdle is lifted, Russia could weigh negatively on any EBRD decision to approve the $500 million loan because it also may demand a renegotiation of the project’s production sharing agreement, or PSA, people familiar with the matter said this week.

Analysts say Russia may be trying to reorder the PSAs to its benefit, although Russian officials have publicly pledged to respect the deals.

As a result, Russia could use its seat on the board – and its broader influence – on the EBRD to pressure the company into renegotiating the PSAs, the people said.

The EBRD spokesman said that, a change in PSAs, if it happens, should be “undertaken through a fair dialogue between all parties.”

However, when the director in charge of Russia was asked for the government’s view two weeks ago at a briefing, the reply was “I don’t know,” a person familiar with the meeting said.

Jarmo Kotilaine, a senior consultant on Russia for Control Risks said: “In Russia, environmental audits are often politically motivated. What the Russian government wants is a renegotiation of the PSA” a form of contract signed in the 1990s which the government is now less keen to use.

The bank had previously focused on its own, independent environmental assessment to make a decision but attention has now shifted to any signal the Russian government may send, they said. But the EBRD’s increased reliance on Russian views is bad news for Shell because the people involved in the lending talks have previously said the company was hoping the involvement of international lenders could alleviate Putin’s government pressures on the project.

Any decision will influence a $5 billion project loan being put together by other credit agencies and commercial banks, as previously indicated by both the EBRD and people close to the other potential lenders.

In the meantime, the cancellation of the permit will add pressure on the EBRD from non-governmental organizations which have long campaigned against financing of the project in its current form.

Earlier this week, Sakhalin Environment Watch, Pacific Environment and CEE Bankwatch Network sent a letter to the EBRD President Jean Lemierre, insisting “that Shell cannot credibly demonstrate that Sakhalin II complies with the bank’s policies” after Russia signaled it would cancel the permit. Shell couldn’t immediately comment.

The Sakhalin Energy consortium, which manages the project, is majority owned by Shell, while a subsidiary of Japan’s Mitsui & Co. Ltd. (MITSY) holds a 25% stake and Diamond Gas Sakhalin, a subsidiary of Japan’s Mitsubishi Corp. (8058.TO), holds 20%.

-By Benoit Faucon, Dow Jones Newswires; +44 20 7842 9266; [email protected]
 

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