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RIA Novosti: Sakhalin II problem can be resolved by talks – Putin

President Putin

10:37 | 21/ 10/ 2006

LAHTI (Finland), October 21 (RIA Novosti) – The problem around the giant Sakhalin II oil and gas project on Russia’s largest Far East island may be resolved through talks, Russian President Vladimir Putin said Friday.

“We believe that we should sit at the [negotiation] table and seek an agreement. We are convinced that we will find a resolution,” Putin told a news conference following an informal EU summit.

He said the Sakhalin II project is facing not only ecological problems, because foreign investors are demanding a two-fold increase in their spending.

Earlier, it was reported that Sakhalin Energy, the operator of the oil and gas project on Russia’s largest Far East island, proposed increasing expenditures on the project to $21.9 billion.

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 begins receiving its share of profits only after investors have recovered their costs.

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, thereby putting off the date by which the Russian government will receive a share of the profits. Sakhalin II has also come under attack from Russia’s environmental authorities for the large-scale destruction of the island’s ecology.

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. However, it has yet not formally implemented its decision.

Yury Trutnev, Russia’s natural resources minister, said earlier that the results of the investigation into violations of environmental laws will be drawn up October 25, during his visit to Sakhalin.

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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