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UpstreamOnline: West ‘overreacted’ to Kremlin moves

By Upstream staff
26 September 2006

Western governments have overreacted to Russian concerns about a massive foreign energy project here because the legal basis for the development is not under question, a Kremlin source said today.

Moves by Moscow to strip the massive Shell-led Sakhalin 2 oil and gas project of its environmental permits and hostile moves towards other big oil projects led by BP and ExxonMobil have prompted an angry reaction from Western governments, Reuters reported.

Top officials from Britain, Japan and the Netherlands have expressed their strong displeasure. Diplomats here have vowed to “prevent another Yukos” – a reference to the Kremlin-led campaign which forced privately owned Russian oil company Yukos into bankruptcy and jailed its owner.

But the source said such fears were exaggerated because Russia’s main worries about Sakhalin 2 were environmental rather than political or business-led.

“Nobody questions the existence of the contracts and Russia confirms its obligations on the contracts,” the source said, speaking on condition of anonymity.

“Nobody has issued an order forbidding the contractors so Sakhalin Energy is continuing operations in accordance with the contract.”

The Kremlin source said Russia had become concerned in particular about the Sakhalin 2 project, in which Japanese companies Mitsui & Co and Mitsubishi also have big stakes.

This was because checks showed that the operating company had not complied with a number of recommendations to minimise damage to the environment.

“Now (the environmental watchdog) is demanding they pay more attention to ecology. But nobody has stopped the operation, nobody has argued about the existence of the (contractual) regime; the situation was politicised,” he said.

Western oil analysts say they believe that the Kremlin’s concerns about the project are motivated mainly by a desire to secure more favourable terms under the agreement, which was signed at a time of lower world oil prices and greater Russian need for foreign investment.

But the source denied this. “Sakhalin 2 is a unique situation; the ecologists are highly appreciative of the action of the Russian state,” he said.

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