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Asahi Shimbun: Clouds of uncertainty hover over mammoth oil and gas project off Sakhalin Island…

Clouds of uncertainty hover over a mammoth oil and gas project off Russia’s Sakhalin Island that offered a major new energy source for Japan. But all of a sudden, Russia’s Natural Resources Ministry has revoked its 2003 environmental approval for the Sakhalin II project.

Published: Sep 21, 2006

It seems inconceivable that the Russian government will take steps to forcibly shut down the project, which is now 70 percent complete. But the move is almost certain to delay the scheduled start of production and export of liquefied natural gas in summer 2008

The agreement on Sakhalin II was signed in the early 1990s at a time of low oil prices under the government of President Boris Yeltsin, which was strapped for foreign currency

Funds for the Sakhalin venture were provided by a consortium of three foreign companies. Royal Dutch/Shell Group has a 55 percent stake in Sakhalin Energy Investment Co., the operator of the project, while Japan’s Mitsui & Co. and Mitsubishi Corp. hold 25 percent and 20 percent stakes, respectively. Moscow has long complained about the production-sharing agreement on grounds the deal excludes Russian entities from the development and its limited terms concerning Russia’s share of the profits. Russia’s decision to yank the permit seems clearly aimed at having a bigger say in the project, say industry observers

Such strong-arm tactics will inevitably undermine investor trust in the Russian government. All the more so because a basic agreement has been reached to give Gazprom, Russia’s state-controlled natural gas monopoly, a 25 percent stake in Sakhalin II through an asset swap arrangement with Shell. Russian President Vladimir Putin’s energy strategy focuses on enhancing the country’s national security by putting its natural resources under state control. In 2004, Putin dismantled oil giant Yukos in a drive to tighten the government’s grip on the country’s lucrative oil and gas industry. Moscow’s latest action concerning Sakhalin II is clearly being driven by “resource nationalism.” Still, it would be unfair to call the Russian government’s decision to revoke the environmental approval a mere ploy to meddle in the project. Public consciousness about environmental problems is also growing in Russia. Thus, development projects of this kind have come under close scrutiny by international environmental observers

In fact, international conservation groups had voiced concerns about the environmental impact of Sakhalin II

They say offshore drilling in the region poses a serious threat to the habitat of the endangered western gray whale. The work to lay an 800-kilometer pipeline to the gas liquefaction plant would cross more than 1,000 rivers and could harm salmon spawning grounds. Deforestation is another aspect of the construction work that concerns environmentalists as ecological destruction. All these concerns should be taken seriously. The investors, Japanese firms included, should act swiftly to look into the environmental problems cited by the Russian authorities. They need to make convincing arguments to correct misunderstandings, if any, and offer remedies to alleviate such concerns as soon as possible

The Russian government obviously recognizes the importance of the Sakhalin II project. The situation clearly requires further talks. The governments of the countries concerned–Japan, Britain and the Netherlands–must try to find ways to cooperate. Shell is a British-Dutch oil company. In this new era of high-flying oil prices, promoting its own projects to develop new energy sources should be a vital part of each country’s national strategy. Undoubtedly, Sakhalin II is very important for Japan’s efforts to reduce its dependence on the Middle East for energy

Moscow owes the investors in the project a good explanation for its action. But the incident should serve as a cautionary lesson about the risks involved in such overseas development projects when resource nationalism is heightening across the globe

The Asahi Shimbun

Copyright 2006. Asahi Shimbun

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