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RIA Novosti: Wrap: Russian authorities relax pressure on Shell over Sakhalin II

22:33 | 17/ 10/ 2006 

MOSCOW, October 17 (RIA Novosti) – Pressure on oil major Royal Dutch Shell over a vast oil and gas project in Russia’s Far East, which has come under attack over environmental destruction allegations, seemed to lift Tuesday.

Energy Minister Viktor Khristenko said the project’s 1994 production sharing agreement would remain unchanged, while a Moscow district court refused to consider a lawsuit by the environmental watchdog to enforce the Natural Resources’ Ministry’s annulment of a key permit for the project.

Meanwhile, the Angl-Dutch oil company said negotiations with Gazprom on the Russian energy giant’s participation in the project, which analysts believe to be the root of the dispute, were going well.

Under a previous deal, Gazprom was to provide a stake in a gas field in exchange for a share in Sakhalin-II. However, Shell announced in 2005 that the cost of the project’s development would be more than doubled, a move that complicated the terms of the asset swap.

PSAs in Russia

Three vast hydrocarbon projects have been implemented in Russia under PSA agreements: Sakhalin II led by the Anglo-Dutch giant, another Far Eastern project Sakhalin I run by the U.S.’ Exxon Mobil, and the Kharyaga deposit operated by Total.

Devised in the 1990s when oil prices were much lower, PSAs offer investors major tax benefits, which provided a kind of risk bonus for investing in Russia. Under PSAs, Russia will also start receiving its share of profits only after investors have recovered their costs.

Energy Minister Viktor Khristenko said a decision to revise the PSA should be mutually agreed.

When asked whether the Sakhalin II could be transferred to the traditional taxation regime, he said: “I cannot propose anything today and cannot consider such proposals as no one has made them.”

Environmental controversy

Leading international environmental groups including Greenpeace and the International Fund for Animal Welfare have been vigorously campaigning against Sakhalin II for years. Sakhalin, Russia’s largest island, is covered in dense forests and teems with diverse wildlife. Environmentalists say they had received little support from the Russian authorities in their struggle to protect salmon and gray whale populations – until the current dispute.

The Federal Service for the Oversight of Natural Resources, Russia’s environmental watchdog, has been conducting the official probe into the project. The agency’s deputy head Oleg Mitvol, who is leading investigations, said his expert group has found numerous violation of conditions set out in the project’s feasibility study, including the illegal routing of an oil pipeline through the territory of a national preservation area and environmental damage at Aniva Bay.

Mass fish and crab deaths have been reported in the area, and inspectors earlier established that a Sakhalin Energy vessel dumped a mixture of methylene dichloride and lubricating oil into the bay.

The agency’s allegations echo the concerns voiced by environmental groups.

Mitvol said billions of dollars will be needed to alleviate the environmental impact in the Aniva Bay caused by the Sakhalin II project.

He criticized Shell-controlled project operator Sakhalin Energy for resorting to political blackmail instead of attempting to correct its mistakes. “What happened was quite a surprise for Sakhalin Energy,” he said. “And I have heard of nothing being done except resorting to political pressure from the company’s friends inside the country, and no engineering solutions have been found.”

On September 18, the Natural Resources Ministry annulled its own 2003 Sakhalin Environmental Expert Review (SEER), which gave the project a positive evaluation, following action from prosecutors. But it has yet not formally implemented its decision.

In a bid to enforce the annulment, the environmental agency on Tuesday filed a lawsuit against the Natural Resources Ministry.

But a Moscow district court refused to consider the agency’s lawsuit.

“The court refused to consider the lawsuit because it believes that the Federal Service for the Oversight of Natural Resources does not have the right to file this lawsuit,” said Dmitry Kolosov, a spokesperson for the environmental watchdog, after the court session.

If the court were to uphold the demands of the environmental watchdog, all activity under the Sakhalin II project would have been suspended until a new environmental survey was conducted, and until the project operator dealt with all environmental violations.

The possible suspension of the project following the revocation of the environmental review means plans to develop a crucial LNG plant will be delayed, which will put in jeopardy contracted deliveries to Japan, South Korea and the United States, due to start in 2008.

Royal Dutch Shell and Sakhalin Energy

Shell said Tuesday it will demonstrate to Russian authorities during a minister’s visit to the region next week that it has tackled the environmental infringements of which it is accused.

Natural Resources Minister Yury Trutnev will head a delegation to the Far East island on October 24-26, with heads of the Federal Service for the Oversight of Natural Resources, the Federal Agency for the Management of Mineral Resources, the General Prosecutor’s Office and representatives of the Russian president’s envoys in the Siberian and Far Eastern Federal districts.

Chris Finlayson, head of Shell Russia, said 90% of the violations of which the company is accused by Russia’s environmental watchdog relate to an 800-kilometer (500 miles) oil pipeline, where Shell has already suspended work on several stretches. The company representative said allegations of environmental damage at Aniva Bay, near the village of Prigorodnoe, were mere speculation.

Sakhalin Energy filed an appeal within the Sakhalin prosecutor’s office for environmental protection, accusing Russia’s environmental watchdog of breaking the law while conducting a probe into the project.

Prosecutors have summoned the acting head of the local environmental agency for questioning.

Dmitry Belanovich “has been ordered to attend the prosecutor’s office on October 18, with a full list of people involved in inspecting the observation of environmental protection legislation on Sakhalin,” the Natural Resources Ministry said.

Sakhalin Energy said prior to the revocation of the study that accusations about environmental performance were “deeply misleading,” and were “based on a procedural argument relating to the internal workings and mandate of component agencies making up the Ministry of Natural Resources.”

Shell and Gazprom

Some analysts interpreted the environmental watchdog’s activity around the Sakhalin II project to be a form of pressure on Shell to conclude a deal with Gazprom, because the Russian energy giant is looking to gain a 25+1% share in the Sakhalin project in return for a 50% stake in the massive West Siberian Zapolyarnoye-Neocomian project.

Shell announced last July that it signed a memorandum of understanding with Gazprom on the swap, which it said then was “strategically important to both parties.”

But later Shell announced that the estimated cost of the project implemented under a production-sharing agreement had doubled. The cost increase has complicated state-controlled Gazprom’s bid to swap a share in one its fields for 25% of Sakhalin II.

Industry and Energy Minister Viktor Khristenko said Tuesday changes in the composition of the participants in the Sakhalin II project are dictated purely by corporate interests.

“Internal participant changes are continually taking place in projects implemented in line with the product sharing agreement. They are dictated by corporate interests and nothing else,” he said.

The Sakhalin II project comprises an oil field with associated gas, a natural gas field with associated condensate production, a pipeline, a liquefied natural gas plant and an LNG export terminal. The two fields hold reserves totaling 150 million metric tons of oil, and 500 billion cubic meters of natural gas.

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