Bloomberg: Russia May Hurt Reputation Over Sakhalin, Japan Says (Update2)

By Christian Schmollinger and Lucian Kim

Sept. 27 (Bloomberg) — Russia’s threat to halt a $22 billion oil and gas project may damage the nation’s reputation among overseas investors amid criticism the process lacks transparency, a Japanese official said.

The action against the Sakhalin-2 venture owned by Royal Dutch Shell Plc and Japan’s two biggest trading houses is “one- sided,” Yasuo Saito, Japan’s Ambassador to Russia, told a conference on Sakhalin island.

The Natural Resources Ministry decided yesterday to give Shell one month to fix any environmental violations before taking away the liquefied natural gas project’s permit. The government is enforcing compliance at Sakhalin-2 as President Vladimir Putin tightens his grip over Russia’s oil and gas industry.

“I think the one-sided, unilateral annulment of a three- year-old governmental approval cannot avoid the criticism that the decision lacked procedural transparency,” Saito told the Sakhalin Oil & Gas Conference in Yuzhno-Sakhalinsk. “This is disappointing with regards to investors’ perception of Russia as an investment market.”

Shell must respond to government requests for proposals on fixing environmental and safety problems, Natural Resources Minister Yuri Trutnev said yesterday in Moscow. His ministry started a review on Sept. 25 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.

Japan Demand

Tokyo Electric and other Japanese utilities have agreed to buy a combined total of about 4.5 million tons of LNG a year from Sakhalin-2, which will be the closest LNG project to Japan. The venture plans to produce about 9.6 million tons a year of LNG.

The Sakhalin project is 45 percent owned by Mitsubishi Corp. and Mitsui & Co., Japan’s two biggest trading companies while Shell owns the rest. OAO Gazprom, run by the Russian government, is in talks with Shell about swapping assets to acquire a 25 percent stake in Sakhalin-2.

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.

Trutnev’s 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 yesterday. The document, which was approved by a predecessor, had more than 60 matters of concern regarding the environment or safety, he said.

BP’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.

To contact the reporter on this story: Christian Schmollinger in Yuzhno-Sakhalinsk [email protected] or Lucian Kim in Yuzhno-Sakhalinsk at [email protected] .

Last Updated: September 26, 2006 21:50 EDT

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