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Daily Telegraph: Russia threatens Shell with criminal inquiry

Sakhalin II

(Workers at the Sakhalin-2 project’s liquefaction gas plant in Prigorodnoye, south of Yuzhno-Sakhalinsk)

By Ambrose Evans-Pritchard Last Updated: 12:34am BST 26/10/2006

Russia has threatened to launch a criminal inquiry into Royal Dutch Shell’s Sakhalin-2 project, alleging breach of ecology laws on the mountainous Pacific island. The heavy-handed approach is widely seen as a ruse to pressure Shell and its Japanese partners to let the Kremlin into the venture. Critics call it as a thinly disguised repeat of the Yukos seizure.

Yuri Trutnev, the natural resources minister, claimed that the $22bn (£11.7bn) project had broken five articles of the Russian criminal code, citing illegal logging and water pollution.

“This falls under criminal law and we think it’s necessary to apply it. All the relevant document should be sent to the prosecutor general within two weeks. I don’t understand how a company working in Russia can view itself as above the law,” he said.

Regulators have already frozen the environmental permit, warning that they may revoke it altogether. Shell has sunk $10bn into Sakhalin-2, the biggest liquefied natural gas project in the world. It owns 55pc, while Japan’s Mitsui and Mitsubishi own 25pc and 20pc.

The venture is managed by Sakhalin Energy, which insisted yesterday that the stand-off would not delay the project, due to come on stream in 2008 supplying Japan and Korea.

advertisement”We will take the appropriate action in concert with all regulatory bodies. There is no question of our commitment to correct any errors that we or our contractors may have made,” said Ian Craig, Sakhalin Energy’s chief executive.

Sakhalin-2 is the only wholly foreign-owned energy venture, a concession extracted in 1994 when Russia was desperate for outside investment. Minority operators, such as Exxon-Mobil and Total, are also coming under pressure.

President Vladimir Putin, backed by Russia’s new oil wealth, has been reversing the fire-sale auctions of the 1990s, deeming them theft of the Russian people’s birthright. Slim Kallas, the European Commission’s vice-president, spoke of “dreadful similarities to the Stalinist era of the 1930s”.

Mr Putin dismissed claims that the ecology investigation was a pretext, noting that Washington had halted BP’s operations in Alaska over pollution.

The apparent attempt to rewrite the rules on Sakhalin-2 has prompted a furious rebuke from Shinzo Abe, Japan’s prime minister, who said it would have “a negative impact on relations with Russia”.

The latest twist in the Sakhalin saga comes after an apparent deal. Mr Trutnev said last week that there was no longer “any point stopping the project” because Shell had made a “180-degree about-turn”.

Shell has been subjected to 200 separate inquiries and audits so far this year, even though the Sakhalin-2 project was given a formal seal of approval by a panel of 70 independent Russian scientists in 2003.

The true motive for the Russian move may be the escalating costs of the venture, which have jumped from $10bn to nearer $22bn, delaying the day when the Russian state draws royalties and raising the cost to Gazprom for a stake.

Vladimir Chizov, Russia’s ambassador to the EU, said there would be no more licences for foreigners.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/10/26/cnshell26.xml

Related article

Daily Telegraph: The Sakhalin power struggle

Last Updated: 11:49pm BST 25/10/2006

June 1994: Consortium led by Marathon Oil of the US with Shell, Mitsui and Mitsubushi of Japan signs deal agreement with Russia to tap oil and gas reserves off Sakhalin island in eastern Russia

June 2000: Shell acquires Marathon’s 37.5pc stake in the joint venture to develop Sakhalin bringing its total holding to 62.5pc

May 2003: Shell, Mitsui and Mistubushi give the final go-ahead to invest $10bn in the Sakhalin-2 project

May 25 2006: Russia’s natural resources ministry says it plans to ask the Duma, the lower house of parliament, to review production-sharing agreements for Sakhalin oil and gas projects signed in the 1990s. The ministry claims they are damaging Russia’s national interests. Shell now has a 55pc stake in the Sakhalin-2 venture, which is Russia’s biggest foreign investment project. Gazprom has signed a memorandum of understanding to take at least a 25pc stake

August 3 2006: Fears of protectionist measures to enable Gazprom to run the Sakhalin project are raised as Russia’s natural resources ministry says Shell should stop building the necessary pipelines due to a danger of mud slides in the area August 28 2006 Shell says the halting of construction work on two pipelines tied to the Sakhalin-2 project is unlikely to put back production

September 18 2006: Russia’s natural resources ministry asks the country’s oil and gas development agency to cancel Shell’s environmental licence. Without a licence it cannot produce hydrocarbons September 19 2006 Russian officials insist that attempts to cancel the environmental permit for the Shell-led Sakhalin-2 natural gas project were motivated entirely by serious environmental violations and had no underlying political motive September 20 Alexander Losyukov, Russia’s ambassador to Japan, tries to win support in Tokyo by saying the project would advance faster if Gazprom, the state-controlled gas business, had a stake in the consortium, which has two Japanese corporations, Mitsui and Mitsubishi (45pc combined) as partners September 22 Foreign secretary Margaret Beckett warns that Russia’s threat to the future of the Sakhalin-2 project is the sort of move that “shakes confidence in foreign investors”

September 26 2006: Moscow’s natural resources minister Yuri Trutnev allows work to proceed on the Sakhalin-2 project while a month-long environmental probe is carried out October 16 Shell’s chief executive Jeroen van der Veer says the ecological issues had been “fully addressed”, while Russia’s resources minister Yuri Trutnev gives an upbeat assessment of a meeting between the two men October 18 The offices of the Russian environment agency, which cracked down on Shell’s Sakhalin-2 development, are raided by criminal investigators. Russian officials claim the raid is unrelated to the agency’s investigations into foreign firms operating at Sakhalin October 25 Russian ministers call for a criminal investigation into Shell’s Sakhalin-2 project

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/10/25/bcnsak2.xml

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