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Financial Times: Probe into Shell’s Sakhalin-2 is extended

By Arkady Ostrovskyin Moscow: Published: October 26 2006 03:00 | Last updated: October 26 2006 03:00

The Russian government has extended its environmental probe into Sakhalin-2, the huge oil and gas development project, by another month.

At the same time, it increased pressure on the Royal Dutch Shell-led $22bn (£11.7bn) project by threatening to bring criminal charges for damaging the country’s forests.

Yuri Trutnev, Russia’s minister for natural resources, flew to Sakhalin yesterday and said “the breaches at Sakhalin-2 fall under five articles of thecriminal code”.

He said the charges, mainly related to felling trees without permission, carry a prison sentence of up to seven years, adding that all the relevant documents would be passed to theProsecutor-General’s office within two week.

The government started to apply heavy pressure on Sakhalin-2 after Shell doubled the cost of the project to $22bn.

Sakhalin-2 is one of three oil and gas projects in Russia to be developed under a production sharing agreement – a legal document that is supposed to minimise risk for investors and allow them to recoup the development cost before starting to split the oil and gas production with the government.

The increase in the project costs will delay the moment when the Russian government receives profit from Sakhalin-2.

Russian officials made little secret of a link between an environmental probe and the doubling in the cost of the project.

The intensified probe into the project’s environmental impact comes at a timeof negotiations between Gazprom and Shell about the entry of the Russian gas monopoly into the project.

The earlier asset swap deal that envisaged Gazprom swapping 50 per cent in one of its Siberian fields for a 25 per cent in Sakhalin was soured by the doubling of the cost. Shell said it hoped to reach an agreement with Gazprom by the end of the year.

Mr Trutnev said it was too early to talk about suspending all work in Sakhalin but regional authorities may revoke water-use licences that would halt work. He said the environmental inspectors’ investigation would last another month, which may cause a delay to the project.

Mr Trutnev, who was shown by Russian television standing next to a muddy river, said inspectors would take four months to calculate the damage caused by Sakhalin Energy, the operator of the project.

He said the company would have to undo the damage and pay heavy fines for what cannot be rectified. “The figures will be significant even for such a [rich] company as Sakhalin Energy.”

Ian Craig, chief executive of Sakhalin Energy, admitted that there were certain violations of environmental rules by sub-contractors.

“Every problem will be dealt with in the correct manner and in full partnership, openness and transparency with the supervisory agencies,” Mr Craig said.

Copyright The Financial Times Limited 2006

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