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International Herald Tribune: Shell says talks with Gazprom over troubled Far East energy project going well

The Associated Press
Published: October 17, 2006
 
MOSCOW Royal Dutch Shell PLC said Tuesday that negotiations with Russia’s natural gas monopoly over its participation in a troubled US$20 billion (€15.9 billion) energy project on the Pacific island of Sakahlin were progressing well, Russian news agencies reported.
 
Meanwhile, Russia’s industry minister signaled that Moscow would respect the terms of a series of controversial deals that were signed with major Western energy companies — including Shell — in the 1990s.
 
Viktor Khristenko’s comments appeared to indicate that the government was willing to negotiate with Western companies amid probes by Russian environmental regulators into Western-led energy projects.
 
Russian regulators last month froze a key environmental permit for the Shell-led Sakhalin-2 project. Analysts suggested this was aimed at pressuring Shell to offer OAO Gazprom better terms as it jostles to join what will be the world’s biggest liquefied natural gas development.
 
Negotiations between the two energy companies are “going well,” the head of Shell’s Russian operations, Chris Finlayson, was quoted by Interfax as saying.
 
The freeze provoked alarm in Western capitals that the Kremlin was using strong-arm tactics to secure a strong role in Russian energy projects controlled by multinational oil companies and worried Asian countries such as Japan and South Korea which are to be major customers for the gas.
 
Talks over the original deal in which Gazprom was to swap a stake in a giant gas field for a share in Sakhalin-2 have been complicated by Shell’s announcement last year that the cost of the complex development would more than double to over US$20 billion (€16 billion).
 
A Gazprom spokesman declined to comment.
 
In September the monopoly said that talks had been frozen for a year over the cost increase, which had complicated the terms of the asset swap.
 
Finlayson also said that the company had resolved nearly all of the ecological violations at Sakhalin-2 so far presented by environmental officials. He said he was looking forward to a meeting slated for next week with Natural Resources Minister Yury Trutnev, who is to visit the island.
 
“We want to show what progress we have made,” he was quoted as saying.
 
However, Shell spokesman Maxim Shub told The Associated Press that an ongoing audit of environmental watchdog Rosprirodnadzor could yield further claims of violations.
 
Sakhalin-2 is one of a handful of major field developments signed in the 1990s by BP PLC, Exxon Mobil Corp., and Total SA to have come under closer environmental scrutiny in recent months. Analysts have linked the scrutiny to a drive by the Kremlin to increase state control of the energy sector.
 
The deals — called production sharing agreements — handed control of difficult energy projects to foreigners as a way to get them going at a time when Russian lacked the money to get them under way independently. Foreign companies were allowed to recoup their costs before the state took a share of the profits.
 
Russian officials, however, now criticize the terms of those deals as being unfair.
 
Khristenko criticized the PSAs as they were negotiated in the 1990s.
 
“Today I would have never signed the agreements in that form,” he told reporters at a news conference in Moscow.
 
Khristenko also said that if the costs in Sakhalin-2 were indeed going to double, then an agreement that would protect Russia’s economic interests should be negotiated.
 
The natural resources ministry also has been reviewing the licenses of Russian companies, including the nation’s No. 1 producer Lukoil. However, some observers have suggested that those checks are aimed at shaking off charges of bias over the audits of foreign-led projects.
 
Meanwhile, a Moscow court on Tuesday refused to hear a suit filed by Rosprirodnadzor that aimed to annul the key environmental permit at the project, in an apparent victory for Shell.
 
Last month, the ministry froze the permit but it has allowed construction work to continue at Sakhalin-2. 

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