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Financial Times: Sakhalin-2 fell foul of zealous official

By Arkady Ostrovsky
Published: September 29 2006 03:00 | Last updated: September 29 2006 03:00

What do a Soviet pop diva, small country cottage owners and one of the world’s largest oil and gas projects have in common? The answer is simple. They have all become a target for a mid-level official who has built up an image as a fearless defender of the environment against the rich and powerful.

Oleg Mitvol, deputy head of Russia’s inspectorate for the use of natural resources, with a staff of two, is a colourful figure. A former entrepreneur in chemicals and the media, he earned himself a reputation in some business circles as a corporate raider. He was a business partner of Boris Berezovskybefore turning against the former oligarch who went into self-imposed exile in London. In 2004 he surprised many when he joined the civil service as an environmental inspector.

In that role he last year picked a fight with Alla Pugacheva, the country’s most famous pop singer, for building her dacha too close to a reservoir. He supervised a violent raid by Russian commandos on a dozen far more modest country houses outside Moscow which his agency said were built illegally. Sometimes his actions yielded results, sometimes not, but invariably he received plenty of media coverage.

But his latest target has been Sakhalin-2, the $20bn oil and gas project in the far east of Russia developed by a consortium of companies led by Royal Dutch Shell. Two weeks ago he told reporters that within a few days the ministry of natural resources would cancel an environmental permit for Sakhalin-2 that would halt its development, which it did. This ignited one of the biggest international disputes over an energy project.

The prosecutor general’s office issued a statement that the environmental assessment approved in 2003 was at odds with the law.

Alarm bells rang in Tokyo, Washington and London. But so far the threats have turned out to be worse than reality. Sakhalin Energy, the operator of the project in which Shell owns 55 per cent, says it received no official notification from the ministry of natural resources. The ministry of energy, responsible for the Sakhalin production sharing agreement with Shell, remained mostly silent and the work went on as usual.

A spokesman for Sakhalin Energy says the first official communication the company received was a letter from Mr Mitvol informing it of his visit to launch a fresh environmental investigation that would take a month to complete. This week he chartered an executive jet to fly journalists and environmentalists – unused to such luxury – to the island in order to demonstrate the project’s environmental damage, which he yesterday estimated at up to $50bn (€39bn, £26bn).

But the timing and the zealous nature of the latest investigation raises questions about why the campaign has begun only now, given that environmental concerns have dogged the Sakhalin-2 project for years. Until recently the European Bank for Reconstruction and Development deemed the project “unfit for purpose” and expressed concern for the island’s rivers.

Shell was forced to re-route its offshore pipeline to avoid a feeding ground for the world’s only population of 100 grey whales at a cost of more than $300m.

Maria Vorontsova, head of the Russian arm of the International Fund for Animal Welfare in Russia, concedes that Shell responded to pressure from environmental groups.

Ivan Blokov, campaign director for Greenpeace Russia, says Sakhalin-2 still ranks as one of the top environmental threats in Russia. For instance, the pipeline has had an impact on hundreds of rivers and forests. Shell says most problems have been rectified.

“The environmental permission which dates back to 2003 should never have been issued in the first place because it violates Russian law,” says Mr Blokov. Yet until now nobody, including the ministry of natural resources, has paid much attention. The Kremlin treated environmental groups with suspicion, seeing them as a nuisance at best and as an extension of foreign intelligence services at worst.

Shortly before becoming Russian president, Vladimir Putin, then still head of the Federal Security Service, remarked: “Unfortunately, foreign special services often use ecological and non-governmental organisations as a cover. This is why, whatever the pressure from media and NGOs, these organisations will always be under our piercing scrutiny.”

So what lies behind Russian authorities’ suddenly discovered concern for the environment?

German Gref, Russia’s minister for economic development, believes the crackdown was “detonated” by Shell doubling the project’s budget to $20bn. Because Sakhalin-2 is developed under a production-sharing agreement, any cost increase delays the moment when Russia starts profiting from the project.

“I have told Shell that we can’t simply swallow this figure and that they need to come up with some kind of solution,” Mr Gref told the FT this week. Analysts say Russia has a legitimate cause for indignation, but applying pressure on Shell through environmental concerns undermines Russia’s reputation and discredits its respect for due legal process.

Sakhalin-2 stands out among Russian oil and gas projects – and not only for its size. It is being developed by foreign companies without any Russian participation – a model the Russian government dislikes.

Gazprom, the state-controlled gas monopoly, tried to enter the project by swapping half of its gas field in Siberia for a 25 per cent stake in Sakhalin-2. But the deal went sour after the cost increase, prompting some analysts to suspect that a month-long probe into Sakhalin-2’s environmental compliance looks like a time-table for agreeing a deal with Gazprom. As a speaker at a conference put it this week, once Gazprom is in, “existing problems will be resolved automatically”.

Copyright The Financial Times Limited 2006

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