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Bloomberg: Russia to Reject Shell Sakhalin Budget Request (Update1)

By Lucian Kim

Oct. 4 (Bloomberg) — The Russian government won’t approve Royal Dutch Shell Plc’s request to increase the budget for its Sakhalin-2 oil and gas venture, which has been threatened with delays amid calls for a greater local role in the country’s biggest foreign-run energy project.

Shell’s request to double to $20 billion spending on the project’s second phase is unacceptable, Arkady Dvorkovich, President Vladimir Putin’s top economic aide, said today in Moscow. Shell can resolve the budget question by sticking to the original production-sharing agreement, seeking to renegotiate the accord’s terms or by selling its stake in the venture, he said.

“The PSAs are safe if the agreements are followed” as they were originally laid down, Dvorkovich said. “It was clear from the very beginning that the Russian side would never accept” the budget increase, he said.

Shell, BP Plc, Exxon Mobil Corp., and Total SA have been urged by the Natural Resources Ministry to cede some control of oil and gas fields to government-run or state-aligned companies. The foreign-led ventures have become anomalies in Russia as Putin increases state control over the energy industry.

There is “no campaign” by Russia to increase the state’s role in such projects, Dvorkovich said today at the Russia Talk conference in Moscow.

The environmental probes of Shell’s Sakhalin-2 and Exxon Mobil’s Sakhalin-1 operations are normal and Shell can expect to find a resolution for its ecological problems, Dvorkovich said.

The Natural Resources Ministry said Oct. 2 Shell’s Sakhalin- 2 unit must reapply for approval of a key pipeline project, after officials threatened last month to halt construction at the venture.

The first phase of the Sakhalin-2 project, which has already been completed, cost $2 billion. Shell announced in July 2005 that the cost of the second phase, involving the construction of the pipelines, new platforms and the LNG export terminal, had doubled to $20 billion.

To contact the reporter on this story: Torrey Clark in Moscow at [email protected]

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