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Bloomberg: Shell, Japan Criticize Russia Over Sakhalin Threats (Update1)

By Christian Schmollinger and Lucian Kim

Sept. 27 (Bloomberg) — Royal Dutch Shell Plc and Japan’s ambassador criticized Russia’s threat to halt the $22 billion Sakhalin-2 oil and gas project, citing “abnormal” and “one- sided” demands.

The action against Sakhalin-2 may harm investors’ perceptions of Russia, Yasuo Saito, Japan’s ambassador to Russia, told the Sakhalin Oil & Gas Conference in Yuzhno-Sakhalinsk today. Multiple environmental inspections were “rather abnormal” and added to uncertainty, said Ian Craig, chief executive officer of the Shell-led Sakhalin Energy Investment Co.

“The one-sided, unilateral annulment of a three-year-old governmental approval cannot avoid the criticism that the decision lacked procedural transparency,” Saito said. Sakhalin-2 is the largest foreign investment so far in Russia, the world’s largest oil and gas producer.

President Vladimir Putin’s government is tightening its control over Russia’s oil and gas industry, seeking greater stakes in projects for state-aligned companies OAO Gazprom and OAO Rosneft. Soaring oil prices have led governments from Russia to Venezuela to demand a greater share of revenue.

Russian Foreign Minister Sergei Lavrov said the permits for projects run by Shell and Exxon Mobil Corp. on Sakhalin won’t be canceled because of environmental inspections. The checks are being done because of public demands for “strict compliance on environmental matters,” he said at the conference today.

Not Forced Out

“There are no grounds for the opinion that foreign investors are being forced out of the fuel and energy sector,” Lavrov said. The inspections of Sakhalin projects “don’t mean any licenses will be revoked or canceled.”

Shell, Europe’s largest oil company, must respond to demands for proposals on fixing environmental and safety problems within one month, 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.

The Sakhalin-2 facilities will be inspected later this week, Shell’s Craig said in an interview at the conference. “This is the sixth inspection in two months,” he said. Contradictory announcements by Russia about canceling the development’s license were “not helpful,” Craig said.

Production Accords

Shell, Exxon Mobil Corp. and Total SA run projects in Russia under production-sharing accords, which grant the state a share of oil revenue after the companies recover costs. Shell announced a $10 billion cost increase in the Sakhalin project last year, one week after agreeing to an asset swap that would give Gazprom a 25 percent stake. Russia has not yet approved the cost increase.

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. Russia regained control of Sakhalin Island from Japan in 1924. Ownership of the nearby Kuril Islands remains in dispute between Russia and Japan.

Shell, BP Plc, Exxon Mobil, and Total SA face demands from Russia to cede some control of oil and gas fields to state- aligned companies, 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 27, 2006 03:50 EDT

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