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Bloomberg: Shell’s Sakhalin-2 May Face Russian Criminal Charges

By Lucian Kim and Torrey Clark

Oct. 25 (Bloomberg) — Royal Dutch Shell Plc’s $22 billion Sakhalin-2 venture, Russia’s biggest foreign investment, may face criminal charges as President Vladimir Putin’s government seeks a stake in the oil and gas development.

The Natural Resources Ministry will ask the Prosecutor General’s Office to open a criminal investigation within two weeks into violations by Shell-led Sakhalin Energy Investment Co., the project operator, Resources Minister Yury Trutnev said today in Yuzhno-Sakhalinsk, the biggest city on Sakhalin Island.

The venture “just doesn’t respond to questions,” Trutnev said. “I don’t understand how a company working in Russia can view itself as above the law.”

Shell, BP Plc, Exxon Mobil Corp. and Total SA face demands from Russia to cede some control of oil and gas fields to state- aligned companies such as OAO Gazprom. European and Japanese leaders have raised concerns that Putin’s determination to bolster his control the world’s biggest oil and gas industry may undermine the reliability of Russian energy supplies.

Trutnev’s ministry has accused Sakhalin Energy and contractors at Sakhalin-2 of massive environment and safety violations and threatened to revoke a key permit, which could halt construction.

The project has violated five articles of the criminal code, including environmental damage and illegal logging, Trutnev said.

`Bad for Sakhalin’

“What’s happening is bad for Sakhalin and the people who live here,” Trutnev said.

Contractors should stop construction work at several sites along oil and natural gas pipelines, Trutnev said. The pipelines will ship oil to a year-round export terminal and a plant that will liquefy gas for shipment to Japanese and Korean customers. Nearly all of the LNG output, which is scheduled to start in 2008, has already been sold.

Inspectors will calculate the Shell-led project’s total damage to the environment within the next four months, Trutnev said. An inspection of the project, which was initially scheduled to end Oct. 20, will be extended to the end of November, he said.

The regional authorities may ask for the Shell-led project’s water-use license to be revoked, which could halt work on the project, Trutnev said. The project has caused $100 million worth of pollution and damage to the island’s water resources, said Dmitry Belanovich, the acting head of Sakhalin’s environmental inspectorate.

Gazprom

Shell last year doubled its cost estimate for the project, leading Gazprom, the world’s biggest natural-gas producer, to delay plans to take a stake in Sakhalin-2. The revision also means Russia must wait longer to profit from the project.

Trutnev said he will meet with Energy Minister Viktor Khristenko after returning to Moscow. Khristenko’s ministry oversees the so-called production sharing agreement under which Sakhalin-2 is working.

Shell hopes to reach an agreement to swap assets with Gazprom this year, Chris Finlayson, the head of Shell in Russia, said Oct. 17

To contact the reporter on this story: Lucian Kim in Yuzhno-Sakhalinsk through the Moscow newsroom at [email protected] Torrey Clark in Moscow at [email protected] .

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