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Bloomberg: Russia Delays Shell Cancellation Threat to Oct. 20 (Update2)

By Torrey Clark

Sept. 26 (Bloomberg) — Russia gave Royal Dutch Shell Plc almost a month to remedy violations at the $22 billion Sakhalin-2 oil and gas project, before the government decides whether to cancel a key permit for the development.

Shell must respond to government requests for proposals on fixing environmental and safety problems, Natural Resources Minister Yuri Trutnev said today in Moscow. His ministry yesterday started a review of Sakhalin-2 that will conclude on Oct. 20, after which it will decide whether Shell can finish building pipelines and a plant to liquefy natural gas.

“We must do everything possible to rectify the situation without stopping the project,” Trutnev told reporters in Moscow today. “We don’t see Sakhalin Energy developing new project documents and eliminating the impact on the environment. And if they don’t, we’ll stop the project.”

Shell, BP Plc, Exxon Mobil Corp., and Total SA face demands from Russia to cede some control of oil and gas fields to state- aligned companies, OAO Gazprom and OAO Rosneft. The foreign-led ventures have become anomalies in Russia as President Vladimir Putin increases state control over the energy industry.

“There’s a lot of noise out there,” said Tony Shepard, an analyst at Charles Stanley & Co. Ltd. in London. “We’ll have to wait and see what happens to the BP and Shell projects in Russia.”

No Pressure

Trutnev denied his ministry was putting political pressure on Shell or other companies. The ministry has sought to cancel Shell’s permit to finish building pipelines and a plant to liquefy natural gas at Sakhalin-2, citing environmental and safety concerns.

The permit “should never have been signed,” Trutnev said. The document, which was approved by his predecessor, had more than 60 matters of concern regarding the environment or safety, he said.

Losing the environmental permit could cost Sakhalin Energy about $10 million, lead to a delay of about 17 months in the project and leave 15,000 people out of work, company Vice President Igor Ignatyev said in an interview on Echo Moskvy radio, transcribed on the station’s Web site.

Sakhalin Energy has already committed to deliver fuel from the planned LNG plant to customers in Japan and Korea from 2008.

International environmental groups, such as the World Wildlife Fund and Greenpeace have been fighting the Sakhalin-2 project, saying it could kill off endangered whales, ruin fishing grounds and irreparably damage traditional ways of life on the island.

BP Under Review

BP Plc’s $18 billion Kovykta gas field will be reviewed late this year, running into the start of next year, after which a decision will be made on that project, Trutnev said.

BP’s OAO TNK-BP Holding oversees the Kovykta development.

Valery Pak, the head of TNK-BP unit OAO Rusia Petroleum, was summoned to the Prosecutor General’s Office and “officially warned” his company must fix the problems or face losing its license in the Irkutsk region, according to a statement yesterday posted on the prosecutor’s Web site.

The ministry will also look at Total’s Kharyaga project in the Russian Arctic as part of its regular projects inspections. The ministry’s questions about the project aren’t critical, Trutnev said.

Mitsubishi Corp. and Mitsui & Co., Japan’s two biggest trading companies, hold 45 percent of the Sakhalin-2 project and Shell owns the rest. Shell last year raised the doubled its cost estimate for the second part of the project to $20 billion, making the total cost of the project about $22 billion.

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

Last Updated: September 26, 2006 13:18 EDT
 

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