The Wall Street Journal: Shell Weighs Legal Response

Sakhalin Controversy
Deepens Amid Signs
Of Dispute in Moscow
A WALL STREET JOURNAL NEWS ROUNDUP
September 25, 2006

Managers at Royal Dutch Shell PLC are looking at legal options that could help overcome the cancellation of an environmental permit for a $20 billion project in Russia, people familiar with the matter said late Friday.

Last week, Russia’s Ministry of Natural Resources pulled a key environmental permit for the Sakhalin II oil-and-gas project in Russia’s Far East. Shell, which leads the international consortium on the project, denies wrongdoing.

Work on the project hasn’t stopped, and Shell said it hasn’t been formally notified that the permit has been canceled. Government officials in the U.S., U.K. and the Netherlands have expressed concerns about the project.

Adding to the uncertainty was an announcement Friday by a Russian agency that had been expected to rubber-stamp the decision to revoke the permit that it didn’t have the authority to do so, followed by a second announcement retracting that statement.

Analysts said the episode, involving the Rostekhnadzor agency within Russia’s Ministry of Natural Resources, might indicate internal disagreement on how to proceed, but cautioned that the agency’s motives ultimately remained inscrutable.

Three people familiar with Shell said its managers have struggled to create a dialogue with authorities on the matter, both in Moscow and Sakhalin Island. The company is considering its legal options if it is unable to resolve the issue by other means, they said.

“All options are open,” including legal ones, one person said. Other options include discussions with the Russian government or the use of diplomatic channels, after authorities in the U.K. and the European Union criticized the Russian move.

A spokesman for Sakhalin Energy Investment Co., the venture managing the project in which Shell owns 55%, declined to comment, saying “nothing has changed” since earlier statements.

A Shell spokeswoman said she had “no knowledge” about legal options being considered and that the company doesn’t comment on private meetings.

Sakhalin II had been scheduled to start producing liquefied natural gas in the middle of 2008.

On Friday, the U.S., through a State Department spokesman, said it was “very concerned” by Moscow’s treatment of Royal Dutch Shell.

The spokesman, Tom Casey, said Russia’s actions against Shell “cast doubt” on its willingness to keep international commitments, including promises made at the July summit of the Group of Eight leading nations in St. Petersburg, Russia.

“Those commitments included agreeing to the development of transparent, efficient and competitive global energy markets, as well as specific obligations to uphold contracts and to generate sufficient, sustainable international investments…in the energy sector,” he said.

Meanwhile, the U.K.’s Foreign Office is “very concerned” about the project, a senior ministry official said. Margaret Beckett, the foreign minister, raised the matter with Russia’s foreign minister in New York last week, that person added.

Dutch Prime Minister Jan Peter Balkenende on Thursday phoned Russian President Vladimir Putin, seeking an explanation as well. A spokesman for Mr. Balkenende described the conversation as “constructive.”

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