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Reuters: Update 1: Russia watchdog accuses Shell of barbaric activity

By Elif Kaban and Michael Stott

MOSCOW, Sept 28 (Reuters) – A top Russian environment official stepped up his attacks on the Royal Dutch Shell-led $20 billion Sakhalin energy project on Thursday, saying Moscow wanted damages for every destroyed tree or damaged river.

“If criminal cases are opened for everything, the company will read the Criminal Code, come to its senses, and stop the barbarian activity,” Oleg Mitvol, deputy head of Russia’s environmental agency, told reporters in Sakhalin.

Shell strongly defended its environmental record, saying it had “nothing to be ashamed of and nothing to hide” in the way it had led the Sakhalin oil and gas development, Russia’s biggest foreign investment to date.

Analysts and diplomats say the environmental accusations are a pretext for the Kremlin to force Shell (RDSa.L: Quote, Profile, Research) and its partners to renegotiate their contracts on less favourable terms.

The latest Russian official pronouncements on Sakhalin reflected increasingly contradictory signals from Moscow on the project, in which Japanese companies also have a big stake.

Only hours after Foreign Minister Sergei Lavrov called for dialogue to resolve the crisis, Mitvol urged the suspension of the project, Sakhalin-2.

“We must stop the project and start over again,” Interfax news agency quoted Mitvol as saying on the Far Eastern island. 

“We want criminal cases for every destroyed tree or damaged river.”

Asked about Shell’s environmental record, the company’s top executive in Russia told Reuters Sakhalin-2 was a “world class project with a unique degree of transparency”.

“We have nothing to hide and nothing to be ashamed of on Sakhalin,” Chris Finlayson, president of Shell Exploration and Production Russia, said.

Lavrov had earlier told a news conference he had observed “from the management of Sakhalin Energy a sincere wish to resolve these problems”.

One oil industry source commented about the concern being expressed over the project’s environmental impact: “They are grasping at any straw to find a violation. “Russian regulations are very voluminous and frequently contradictory”.

A Moscow-based diplomat joked that Russia, not normally noted for its concern for the enviroment, would be “counting dead fish worth $50 billion” — a reference to Mitvol’s estimate on Wednesday of the alleged damage Shell had caused.

Lavrov sought to calm such fears on Wednesday, saying the Kremlin did not want to scrap the contract for the venture and was not seeking to push foreigners out of its energy sector.

The crisis has reinforced fears in importing countries over the security of Russian energy supplies following Moscow’s brief halt in January of gas flows to Ukraine over a pricing dispute.

The Sakhalin-2 consortium, Sakhalin Energy, has already pre-sold 98 percent of its output and any delay would hit supplies to customers in Japan and the United States.

Japan is extremely worried because Sakhalin-2 represents 10 percent of its gas supplies for the winter of 2008/2009,” one industry source said.

Sakhalin-2 produces over 70,000 barrels of oil a day for half the year but plans to more than double that during phase-2 which involves the construction of the world’s biggest liquefied natural gas plant with 9.6-million-tonne annual capacity.

Royal Dutch Shell has a 55 percent stake as the operator. Japan’s Mitsui & Co. Ltd. (8031.T: Quote, NEWS, Research) has a 25 percent stake, and Mitsubishi Corp. (8058.T: Quote, NEWS, Research) 20 percent.

SPOTLIGHT ON EXPENSES

Shell angered Moscow a year ago by doubling the cost estimate of Sakhalin-2, delivering a $10 billion bill which, under the production sharing agreement (PSA), is likely to arrive at the Kremlin’s door.

The cost hike has also upset state-controlled gas monopoly Gazprom (GAZP.MM: Quote, Profile, Research), which wants to swap one of its fields for a quarter of Sakhalin-2.

Sources close to the consortium said Russian officials were keen to renegotiate the way Sakhalin Energy claims expenses before it splits the profits from any sales with the government.

Under the PSA terms, Sakhalin Energy recoups costs before sharing profit with the government, but Russian officials must approve any new costs before they can be recovered, they said.

“It’s all about expenses,” said one. “The Russians are very focused on details and dispute everything. The government keeps challenging the expenses saying they are not justified.”

In Amsterdam, Dutch Economy Minister Joop Wijn’s office said he would discuss the crisis during a visit to Moscow next week.

President Vladimir Putin, who has not commented so far directly on Sakhalin, on Wednesday urged the government to take measures against firms breaching licence agreements.

Putin’s remarks, at a meeting with Natural Resources Minister Yuri Trutnev, were not made in the context of Sakhalin-2, but were seized upon by some analysts as a sign of support for the campaign against the Shell project. (Additional reporting by Dmitry Zhdannikov and Tom Miles in Moscow and Anna Mudeva in Amsterdam)

© Reuters 2006. All Rights Reserved.

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