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UpstreamOnline: Business as usual at Sakhalin

By Upstream staff
Monday 25 September 2006

Shell and ExxonMobil said today it was business as usual at their projects on Russia’s Sakhalin Island, despite a political row over the Kremlin’s tough line on rising costs.

The Sakhalin 1 and Sakhalin 2 projects, led by ExxonMobil and Shell respectively, have drawn criticism from Russia’s Natural Resources Ministry because their costs are expected to soar.

The ministry last week withdrew environmental approvals for Sakhalin2, sparking fears the Kremlin was preparing to demand the companies renegotiate terms or even lose their licences.

But both companies told Reuters today that their projects were going ahead without any interruptions.

“Our works are proceeding as normal. We have had no major construction suspension and works are proceeding on the whole route of the pipeline,” said Ivan Chernyakhovsky, spokesman for Sakhalin Energy, the Shell-led Sakhalin 2 group.

Michael Allen, spokesman for Exxon Neftegaz, a group uniting ExxonMobil and its partners on the Sakhalin 1 project, said he was unaware of any order to suspend works or activities.

Shell has infuriated the Kremlin by doubling its cost estimate to $10 billion, while the ministry says ExxonMobil may raise its projected costs to $17 billion from $12.8 billion.

Both projects are governed by production sharing agreements (PSAs) which mean they can recoup their costs before paying any royalties to the Kremlin, so cost increases push back the date when the Russian state can expect to see its first revenues.

Last week industry sources said ExxonMobil had suspended loading of its oil pipeline at Sakhalin 1 to make more technical checks.

Russian officials have previously said ExxonMobil, which plans to load it first export cargo before the end of September, should not start commercial oil exports before 15 November as it had to undergo more checks.

They said trial cargo loadings were possible before that date but only in two tankers instead of five requested by ExxonMobil.

But Allen said the first loading was still scheduled for the end of the month and he was not aware of any differences concerning the number of trial cargoes.

“We are working closely with Russian officials. We have inspectors on the site now to make sure we have a smooth commissioning of the De Kastri terminal,” he said.

Meanwhile, Chernyakhovsky said the threat to withdraw environmental permits from Sakhalin 2 had not materialised.

On Friday, Russia’s technical standards agency, which the ministry had asked to sign off on the decision to withdraw the permits, said in a statement it wanted no part of the decision. This suggested that there were differences in the Kremlin on the issue, although the agency later withdrew its statement.

Chernyakhovsky said Sakhalin 2 had stopped construction work on a seven kilometre stretch of pipeline but the company decided to do so itself, long before receiving an order from officials.

“Works on the project are 80% completed,” he said.

“We haven’t received any order so far from Russian officials concerning suspension of works, ecological permits withdrawal or anything else. If and when we receive them, we will start analysing them.”

Today the ministry said its environmental watchdog Oleg Mitvol would visit Sakahlin 2 this week and hold talks with project managers, to which British, German, Japanese, US, Dutch and South Korean diplomats were also invited.

Analysts said Russia may try to use pressure on Shell and ExxonMobil to renegotiate the terms, which were drawn up in the 1990s and are far more generous than anything available today. PSAs keep the projects ringfenced from the normal tax regime and beyond the reach of state gas monopoly Gazprom.

Fears that Russia was putting pressure on the companies to try to make them concede to less favourable terms prompted British, Dutch, European Union and Japanese problems to express their concern and to ask Russia for an explanation.

The US Energy Department said it hoped Russia would reach an agreement that respected the rule of law and showed the country was open to foreign invesment.

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