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Irish Times: Kremlin threatens to close BP and Shell projects in Russian Far East

By: Chris Stephen in Moscow, Irish Times
Published: Oct 09, 2006

Russia has turned up the heat on oil giants BP and Shell, threatening to shut down two gigantic oil and gas developments in the Far East on environmental grounds.

The threats have created a storm of protest amid accusations that the action is a Kremlin move to force the oil giants to cede control to the Russian state.

Shell’s massive Sakhalin 2 oil and gas project, financed principally by two Japanese companies, has already had its licence suspended by the Ministry of Natural Resources.

The ministry has ordered an inquiry, expected to report in November, likely to recommend improvements costing hundreds of millions of dollars. Its deputy inspector Oleg Mitvol was quoted as saying: “Sakhalin Energy received permission to produce oil and gas. Nobody gave it permission to ruin Russia’s environment.”

The decision has already been condemned by Japanese Prime Minister Shinzo Abe who is concerned that a shutdown or delay will threaten contracts already signed to produce gas for Korea, Japan and the United States, starting in 2008.

BP-TNK, the country’s biggest joint venture, faces similar inquiries over its own Far East operations, and a third inspection is being launched at Total’s Kharyaga oil field.

Green parties have applauded the decision. In May, Friends of the Earth complained that Shell drilling platforms may interfere with the Pacific Grey Whale, and that pipelines can cause damage to salmon rivers in Siberia .

Yet some environmentalists worry that Russia has yet to impose such harsh environmental penalties on its own state-owned companies.

Many think the move is an attempt to persuade the foreign oil majors to hand control to state-owned Gazprom – Sakhalin 2 is the only major energy project in the country without a Russian partner.

“Environmental issues have never been prominent before, it’s a kind of pretext,” said Valery Nesterov, an oil analyst at Moscow investment bank Troika Dialogue. “It’s important to control the gas sector in the far east.”

Moscow has already worked at recovering control of state oil assets sold in the 1990s.

Last year the two biggest private oil companies passed back into state hands: Yukos was absorbed after its founder, Mikhail Khodorkovsky, was jailed in a controversial fraud trial. Roman Abramovich was then persuaded to sell his Sibneft company to the government.

Meanwhile there is speculation in Moscow that the Russian shareholders of BP-TNK are poised to sell their shares to the government.

Shell has already annoyed the Kremlin by declaring a $10 billion cost overrun on Sakhalin 2; under its licence agreement, this increase must be paid by oil exports before Russia can reap any tax revenue.

But even if the oil majors are pressured into giving a slice of control to Gazprom, few expect them to quit. “International oil majors invest everywhere in the world, in Africa and Latin America, in even more risky areas,” said Nesterov. “It ( Russia ) remains a bonanza for the West.”

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