MosNews: Sakhalin Energy Admits to Environmental Violations in Sakhalin-2 Oil Project

Created: 26.10.2006 11:18 MSK (GMT +3), Updated: 11:18 MSK

Sakhalin Energy, operator of Sakhalin-2 oil and gas project, admitted to damaging the eco-system of Russia’s Sakhalin Island, while the country’s Natural Resources Minister Yuri Trutnev gave environmental watchdog Rosprirodnadzor another month to complete its inquire into alleged violations at Shell-led project.

As MosNews has reported on several occasions, the multi-billion-dollar project, led by Royal Dutch/Shell, has been accused of inflicting large-scale damage on Sakhalin’s ecosystem, including illegal deforestation, the dumping of toxic waste, and soil erosion. The production-sharing agreement behind the project, which allows Shell to comfortably recoup all its expenses before sharing any of its profits with the state, is also hugely unpopular with the Russian government. It became especially unpopular last year when Shell announced that expenditures for the project have been doubled to $22 billion.

Shell holds a controlling 55 percent stake in Sakhalin Energy, while Japan’s Mitsui and Mitsubishi own 25 percent and 20 percent, respectively.

Minister Yuri Trutnev, currently on a visit to Sakhalin, also asked the Federal Service for the Oversight of Natural Resources (Rosprirodnadzor) to submit, within four months, a full report on the vast liquefied natural gas project’s alleged violations. He said they were punishable under at least five statutes of Russia’s Criminal Code, and accused regional regulators of failing to ensure compliance with environmental legislation.

“There are a lot of questions for the project’s leaders, construction companies, and our [the ministry’s] regional agencies, which, in my view, have failed to perform their oversight duties properly,” Trutnev said, quoted by RIA Novosti.

On the same day Sakhalin Energy admitted to grave violations in developing the project. CEO Ian Craig told reporters following a face-to-face meeting with Trutnev that the two of them agreed to draw up a joint plan of action to rectify the environmental damage inflicted by the project.

Craig said Sakhalin Energy will be willing to compensate for the damage, but he expressed doubt the ministry’s preliminary estimates, putting it at 10 billion rubles ($371.33 million), are accurate.

According to a Sakhalin Energy press release, the project will remain economically viable despite the revised costs, bringing an estimated $50 billion into Russia’s treasury if oil trades at $35 per barrel, and as much as $80 billion if the oil price is $50 per barrel.

The Sakhalin-2 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 (1.1 billion barrels) of oil and 500 billion cubic meters of natural gas.

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