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RIA Novosti: Sakhalin II project becoming less beneficial for Russia

14:16 | 20/ 10/ 2006 
 
MOSCOW, October 20 (RIA Novosti) – The giant Sakhalin II oil and gas project on Russia’s largest Far East island is becoming less effective for Russia, and raises doubt over product sharing agreements in the country, a member of parliament’s upper house said Friday.

Devised in the 1990s when oil prices were much lower, production sharing agreements such as Sakhalin II offer investors major tax benefits. Under such agreements, Russia will start receiving its share of profits only after investors have recovered their costs.

“On the whole we may say that the effectiveness of the Sakhalin II project had been decreasing for Russia and puts the necessity of using product sharing agreements in doubt,” Viktor Orlov, the chairman of the Federation Council’s committee on natural resources and environment protection, said.

Russia signed the Sakhalin II production sharing agreement in 1994 with Sakhalin Energy, an investment company controlled by oil major Royal Dutch Shell. The company recently raised its cost estimate for the project, thus putting off the date on which the Russian government will receive a share of the profits. Sakhalin II has also come under attack from Russia’s environmental authorities for large-scale destruction to the island’s ecology.

“The most problematic issue is the growth of expenses, which lowers the government’s share,” Orlov said.

Orlov said spending on the project implementation from 1996 to 2014 had been increased by the investor from $10.3 billion to $19.9 billion.

“In 2005 expenses totaled $4.055 billion in comparison with the original estimate of $2.514 billion,” he said.

The senator said another of Sakhalin II’s problems is its interaction with environmental watchdogs.

“The most vulnerable area is environmental protection,” he said, adding that environmental protection laws were violated during drilling work.

Orlov also said the Russian government, in the person of the fuel and energy minister and the Sakhalin Region governor, “failed to create an effective project control system, and there was practically no control over this project until 1997.”

Orlov said Sakhalin Energy was prolonging its work, overstating its expenditures and not employing enough Russians.

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.

Yury Trutnev, Russia’s natural resources minister, spoke for stricter environmental protection laws.

“I believe that Russia’s economic growth should be accompanied by stricter environmental legislation,” he said.

Trutnev also said Sakhalin Energy will probably have to compensate for damage to the environment.

“It’s early to speak about the results of the investigation, but it will most likely be proposed that Sakhalin Energy repair the damage and compensate for it,” he said, adding that the results of the investigation will be drawn up October 25 during his visit to Sakhalin.

Trutnev said Sakhalin Energy will present a plan to rectify the uncovered violations next week. He said the ministry received a letter from Sakhalin Energy CEO Ian Craig, in which the company admits the violations and says it is ready to rectify them.

The Russian Industry and Energy Ministry said Sakhalin II is the worst of the production-sharing agreements.

“I am forced to admit that in terms of economic conditions, the Sakhalin II agreement is the worst of the three PSAs,” Andrei Dementyev, deputy industry and energy minister, said.

He also said he believed there were no reasons to shut down the project yet, and that Russia would have to compensate Sakhalin Energy for all losses it would incur should the project be shut down, except for fines.

Dementyev said the state-controlled overseas oil projects operator Zarubezhneft would be invited to conduct an independent audit of the rising expenditures of Sakhalin II. He said the company has proposed increasing expenditures to $21.9 billion.

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