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Bloomberg: Russian Ministry Renews Attempt to Annul Shell Permit (Update3)

By Garfield Reynolds and Torrey Clark

Sept. 22 (Bloomberg) — Russia’s Natural Resources Ministry resubmitted a request to revoke Royal Dutch Shell Plc’s license for its Sakhalin-2 oil and gas project, maintaining a government threat to halt construction work at the $20 billion venture.

Rostekhnadzor, the federal industrial safety service, said today it wasn’t authorized to grant the Natural Resources Ministry request. It then retracted the comment, saying in an e- mailed statement that the earlier declaration had been sent because of a technical error.

President Vladimir Putin has been stepping up pressure on projects operated by Shell, Exxon Mobil Corp. and Total SA under production-sharing agreements that grant the state a share of the oil revenue after the companies recover costs.

“It’s like a good cop, bad cop approach,” Stephen O’Sullivan, an analyst at Deutsche Bank AG’s Moscow brokerage, said today. “This has delayed the day of reckoning, giving Shell more time to consider its options.”

Natural Resources Minister Yuri Trutnev signed an order earlier this week to cancel part of Shell’s Sakhalin-2 license on environmental grounds. That order had been sent to Rostekhnadzor for approval, which the ministry said was needed to bring the cancellation into force.

Sakhalin Energy, the project operator, hadn’t received any notification about the permit cancellation, said Ivan Chernyakhovsky, a company spokesman.

“Nothing has changed,” he said in a phone interview from Moscow. “Work on the project continues.”

`Unsatisfactory’ Accord

The Natural Resources Ministry will meet Rostekhnadzor next week to discuss the matter, ministry spokesman Rinat Gizatulin said by phone today after the initial statement by Rostekhnadzor.

A halt in the project could delay Shell’s deliveries of 9.6 million tons a year of liquefied natural gas to countries such as Japan and Korea, which are scheduled to start in 2008. Shell said Sept. 18 that construction work was continuing.

“There’s a current of opinion within senior circles in the Putin administration who think that Sakhalin-2 is unsatisfactory for Russia and therefore should be corrected,” said Christopher Granville, managing director of Trusted Sources, a London-based company that analyzes political risk and economics in emerging markets.

Gazprom wants a 25 percent stake in Sakhalin-2. The company, 50 percent owned by the state, suspended talks to join the group after Shell, based in The Hague, said in July 2005 that development costs had doubled from $10 billion, Gazprom spokesman Sergei Kupriyanov said Sept. 19.

The Russian company wants a piece of the project to maintain its gas export monopoly, which generates about 75 percent of its 1.3 trillion rubles ($48.7 billion) of annual gas revenue.

“The obvious solution would be to negotiate an asset-swap with Gazprom in a way that would effectively allow the government to have some claw-back on the terms of the PSA,” Granville said. “That would meet the Russian government’s specific aims without jeopardizing the general investment climate in Russia.”

To contact the reporter on this story: Garfield Reynolds in Moscow at [email protected]

Last Updated: September 22, 2006 09:05 EDT

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