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AP Worldstream: Putin optimistic Russian government will agree with Shell on Sakhalin-2 project

Oct 20, 2006

President Vladimir Putin, speaking Friday in Finland, said he was optimistic his government would reach an agreement with Royal Dutch Shell over the troubled Sakhalin-2 liquefied natural gas project, but said Russia was unwilling to agree to a doubling of its costs.

Shell’s original so-called production sharing agreement, signed in the 1990s, allows the company and its partners to recoup all expenses before sharing any profits with the Russian state.

Royal Dutch Shell said last year it would double the costs at the project it leads to nearly US$22 billion (A17.5 billion).

“If they double their costs, we won’t be getting anything for another 10 years,” a visibly irritated Putin said at a news conference at a European Union summit in Lahti, Finland.

But he voiced optimism for a resolution to the matter.

“We are not creating any problems out of it; we just need to sit down at a negotiating table, and I am sure a solution will be found,” Putin said at a news conference after talks with EU leaders.

Earlier Friday, Russian news agencies quoted deputy Russia’s Industry and Energy Minister Andrei Dementyev as saying the ministry was in talks with investors in the project to reshape its business model.

The Shell-led project has come under intense pressure from environmental regulators since August. Analysts say the probes are being used to pressure the company to reconsider the terms of the original agreement to develop the fields, which are located off the Pacific island of Sakhalin, and to secure access for Russia’s state-controlled OAO Gazprom company to the project.

Dementyev was quoted as saying the government may take a decision to approve or reject the increased cost in early December.

Ivan Chernikovsky, a spokesman for Sakhalin Energy, the consortium developing the project, told The Associated Press that as long as negotiations on the budget overrun were continuing “we cannot comment on the contents and status of these confidential discussions.”

Also speaking at the parliamentary hearing, Russia’s Natural Resources Minister Yuri Trutnev said that while he had received assurances from the consortium running the project that the oversights were being rectified, he could not rule out that work at the development may be halted.

“The Russian Natural Resources Ministry is responsible for the observance of environmental legislation. If Russian laws are going to be trampled on and if the environment is going to be damaged, then we will take measures to stop the project,” the Interfax news agency quoted him as saying.

Trutnev is due to meet with representatives of the consortium on Sakhalin next week, when they will present a plan to resolve the environmental violations.

“It will be proposed that Sakhalin Energy compensate for and resolve the damage,” Trutnev said in televised remarks. He said that the consortium’s chief executive officer, Ian Craig, had sent him a letter “in which the company acknowledges, virtually in full … that it has violated the ecological legislation of Russia.”

In a statement, Sakhalin Energy said that it had notified Trutnev of the state of work to rectify “noncompliant environmental practices” identified in an August environmental audit and would respond “quickly and adequately” if further problems were identified in a check that began on Oct. 3.

Speaking in Lahti, Putin also sought to allay foreign investors’ concerns by saying Russia wanted to create a stable environment for foreign partners.

The recent decision by state-controlled natural gas monopoly OAO Gazprom to bar foreign investors from developing the giant Shtokman gas field under the Barents sea, he said, did not mean Russia was creating an unfriendly investment climate.

“As far as Shtokman is concerned, it has nothing to do with the change of rules in Russia,” he said. “It does not mean that Russia says ‘no’ to the work of foreign partners.”

Associated Press writer Maria Danilova contributed to this report from Lahti, Finland. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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