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Reuters: Russia calls time-out in campaign against Shell

26 Sep 2006 16:14:19 GMT
Source: Reuters
By Elif Kaban and Gleb Bryanski

MOSCOW, Sept 26 (Reuters) – Russia called a time-out on Tuesday in its campaign against environmental violations and cost overruns at Royal Dutch Shell’s Sakhalin-2 oil and gas project after strong criticism from foreign governments.

In an announcement likely to ease tension, Natural Resources Minister Yuri Trutnev said work on the giant offshore project in Russia’s Far East could continue while a full-scale ecological probe, due to start on Oct. 25 and last a month, is held.

“We think we should rectify the situation without stopping the project,” Trutnev told a news conference.

He added that, until the investigation was completed, the official permit for the project would not be revoked. “When the probe is over, we will think what to do next,” he said.

Trutnev said environmental worries included deforestation, damage to the sea, sand clogging river beds and the potential for pipeline damage due to mudslides.

Some analysts have viewed Russia’s environmental concern in this case as a means to put pressure on foreign companies by a Kremlin that is asserting control over natural resources, as well as showing clout in domestic and international politics.

Shell has come under fire from Russia after admitting the project would cost $20 billion, twice as much as it originally estimated, complicating talks on a strategic swap of assets with state-controlled gas monopoly Gazprom .

Gazprom wants to take an equity stake in Sakhalin-2, which will supply liquefied natural gas to export markets such as Japan and Korea. The Kremlin is also pushing to renegotiate the production sharing agreement (PSA) underpinning it.

The so-called PSA is one of three in Russia negotiated in the early 1990s, when oil prices were low, under which Moscow gets no revenues until project costs are covered. This provision makes the cost overruns particularly hard for Moscow to accept.

“There has been a softening in the position. The rhetoric has toned down,” said Deutsche UFG’s head of research, Stephen O’Sullivan.

“Now there will be negotiations. The end result could be better commercial terms for Gazprom in its asset swap talks with Shell,” said O’Sullivan.

Signalling the softer line, a Kremlin source told Reuters on Monday there was no plan to strip the project of its licence to operate on Sakhalin, an island north of Japan where the world’s biggest LNG project is now 80 percent complete.

EASING THE PRESSURE

On Tuesday, politicians in Russia’s parliament and the Far East region came to the defence of the project, which has been hit by complaints from Russia’s environmental and technical watchdogs.

Interfax news agency quoted the governor of Sakhalin region, Ivan Malakhov, as saying Russia had shown through the Sakhalin projects that it could cooperate and keep promises signed in production sharing agreements. “Reputation is more important than money,” he said.

The speaker of the upper house of parliament, Sergei Mironov, a supporter of President Vladimir Putin, ordered the house’s natural resources committee to report back on Sakhalin-2 and get to the bottom of what was happening.

“We are primarily interested in the legal aspects of this issue and the ecological consequences. Protecting the interests of foreign investors is also of no small interest to us,” he was quoted as saying by Interfax news agency.

One diplomat said: “There is a sense that the jackboot is coming off Shell’s neck.” Another added: “It’s a victory of sorts. Now there is some breathing space.”

DEALS IN THE DOCK

Russia’s pressure on production sharing agreements has dismayed Japan, which expects Sakhalin to meet much of its future energy needs, and has evoked protests from Brussels, London and The Hague.

Analysts expected Russia’s tough line to continue as the Kremlin seeks a bigger slice of strategic energy riches.

“The government wants the production sharing agreements done away with, but they can’t get rid of them either,” said Deutsche UFG’s O’Sullivan. “They’ll find a compromise in the end.”

Russia says it will not tolerate increases in the cost of the PSAs such as Sakhalin-2 or the neighbouring Sakhalin-1 project operated by U.S. oil major Exxon Mobil .

Japanese giants Mitsubishi Corp. <8058.T> and Mitsui & Co <8031.T> are the other major investors in Sakhalin-2 after Shell, holding 45 percent between them.

Also under the spotlight are TNK-BP, a joint venture involving Britain’s BP which has been told it could lose its licence to operate the giant Kovykta gas field, and French company Total’s Kharyaga project in Siberia. (Additional reporting by Tom Miles)

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