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Financial Times: Moscow divided over Sakhalin

By Neil Buckley in Moscow

Published: September 21 2006 03:00 | Last updated: September 21 2006 03:00

Signs of disagreements emerged yesterday within the Russian government over whether work should be halted on Sakhalin-2, the $20bn oil and gas project led by Royal Dutch Shell in the Russian far east.

Russia’s natural resources ministry said on Monday it had cancelled a key permit for the project after finding irregularities in an environmental assessment on which the 2003 permit was based.

It said if its decision were upheld by a federal safety agency, construction work on Sakhalin-2 – the biggest single foreign investment in Russia – would have to be suspended pending completion of a new environmental study.

The move brought protests from Japan, the European Union and the UK, while the Dutch government said yesterday that Ben Bot, foreign minister, had demanded clarification from Russia about the decision.

But Kirill Androsov, Russia’s deputy economy minister, said yesterday he saw “no reason” to suspend work on Sakhalin-2 while a new environmental report was prepared.

The more liberal economics ministry has frequently distanced itself from the natural resources ministry and its environmental watchdog, which have intensified their criticism of Sakhalin-2 and two other high-profile foreign-led energy projects in recent months.

Mr Androsov’s words followed an insistence from German Gref, the economy minister, that so-called production-sharing agreements underlying Sakhalin-2 as well as the ExxonMobil-led Sakhalin-1 and Total-led project at Kharyaga in northern Russia would not be cancelled.

Mr Gref added, however, that he was unhappy about spiralling cost estimates at the Shell-led project, which have nearly doubled to $20bn. He said “far from all” the extra costs could be approved. Alexander Losyukov, Russia’s ambassador to Tokyo, said yesterday Russia had “no intention of ending or freezing the Sakhalin-2 project”. His words were apparently aimed at easing tensions with Japan after Shinzo Abe, the next prime minister, said delays in completing the project could damage Russian-Japanese relations.

Sakhalin-2 is due to supply about 6 per cent of Japan’s imports of natural gas, starting from 2008.

Mr Losyukov denied that the environmental action was linked to the desire of Gazprom, the Russian natural gas monopoly, to take a stake in the Sakhalin project.

But he said the project would progress more quickly if Gazprom joined the project consortium, which also includes Japan’s Mitsui and Mitsubishi.

Separately, the ministry of natural resources confirmed yesterday that it had passed documents about alleged failures by Total to comply with the terms of agreement to exploit the Kharyaga field to another agency for review.

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