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Daily Telegraph: Dutch pressure Putin over Sakhalin

By Roland Gribben

(Filed: 23/09/2006)

Diplomatic pressure on Russia to tackle the crisis over the cancellation of Shell’s environmental licence for the $20bn Sakhalin oil and gas project in Siberia increased with the Netherlands joining British protests. Jan Peter Balkenende, the Dutch prime minister, phoned President Vladimir Putin asking for an explanation about why the Anglo-Dutch giant was being penalised and voiced concern about the impact on inward investment.

Britain has already registered concern, with Margaret Beckett, the Foreign Secretary, lobbying her opposite number, Sergei Lavrov, while Japan, one of the main markets for liquid gas from Sakhalin, and the EU have made similar representations. The Kremlin skirted the Sakhalin issue in a statement declaring the talks had discussed agreements reached during Mr Putin’s visit to Holland last year when he heavily criticised project cost increases imposed by the Anglo-Dutch oil group. But a spokesman for the Dutch premier said Sakhalin was the main subject of the conversation and diplomatically described the talks as constructive.

Mr Putin ordered the tougher line after Shell announced development costs had doubled to $20bn (£10.5bn) shortly after Gazprom, the state-owned gas company, had reached agreement in principle to take a stake in a project controlled by Shell and by Mitui and Mitsubishi of Japan. Shell estimates Russia stands to benefit to the tune of $50bn over the lifetime of the project, but Mr Putin is infuriated because the money will not start to flow until Shell and its partners have recovered their costs under the terms of a production sharing agreement.

ExxonMobil is also under fire for cost increases linked to its role in part of the development. The world’s biggest energy group has warned that rising steel prices will help to push its costs up by a third to $33bn. There was confusion yesterday over whether Shell might win a reprieve when Russia’s federal industrial safety regulator was quoted as saying it had refused to authorise cancellation of the licence. However, it was followed by a swift denial with the regulator saying the statement had been annulled.

Shell, meanwhile, is having an easier ride in its efforts to increase its investment in China.

The acquisition of a 75pc stake in Beijing Tongyi Petroleum Chemical and Xianang Petroleum Chemical gives Shell control of China’s biggest oil lubricant producer and a near 10pc share of the total market. Both sides refused to disclose financial terms but the deal is expected to push Shell’s investment in China to well over $4bn. Its exposure before yesterday’s deal in petrochemical, exploration and coal technology deals was standing at $3.5bn.

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