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Sydney Morning Herald: Russia’s reputation on line in oil row

Thursday September 28, 2006

RUSSIA’S threat to halt a $US22 billion ($29 billion) oil and gas project may damage the nation’s reputation among overseas investors, particularly because the process lacks transparency, a Japanese official said.

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

Russia’s Natural Resources Ministry decided on Tuesday to give Shell one month to fix any environmental violations before taking away the liquefied natural gas project’s permit. The Russian 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,” Mr 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 in Moscow. His ministry started a review on September 25 of Sakhalin-2 that will conclude on October 20, after which it will decide whether Shell can finish building pipelines and a plant to liquefy natural gas.

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 per cent owned by Mitsubishi 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 per cent stake in Sakhalin-2.

Shell, BP, Exxon Mobil, 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. Mr 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,” Mr Trutnev said. The document, approved by a predecessor, had more than 60 matters of concern regarding the environment or safety, he said.

BP’s $US18 billion Kovykta gas field will be reviewed late this year, after which a decision would be made on that project, Mr Trutnev said.

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