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The Times: Russia threatens to prosecute Shell over Sakhalin-2

Sakhalin II

By Tony Halpin, in Moscow
26 October 2006

RUSSIA sharply raised the temperature of its dispute with Shell over the Sakhalin-2 project by threatening criminal prosecutions for environmental damage.

Yuri Trutnev, the Natural Resources Minister, accused the Anglo-Dutch company of breaking at least five Russian laws and warned that it faced the loss of licences to develop the giant oil and gas project.

“This falls under criminal law and we think it’s necessary to apply it,” he said.

A file would be sent to Russia’s prosecutor-general within two weeks. At least one of the violations carried a penalty of up to seven years in prison, he said.

Dmitry Belanovich, regional head of Russia’s environmental monitoring agency, said that an inspection was gathering evidence to allow a crucial water licence to be withdrawn. He claimed that damage worth $100 million dollars had been caused to a bay that is the site for a liquefied natural gas (LNG) plant. 
Oleg Mitvol, the agency’s deputy head, who has led the campaign against Shell, said that it would be impossible to continue with construction on the $22 billion project without the licence. He told Ekho Moskvy radio: “Working without the licence is criminally punishable.”

Shell owns 55 per cent of the Sakhalin-2 consortium, known as Sakhalin Energy, with the rest split between the Japanese companies Mitsui and Mitsubishi. Sakhalin-2 contains 150 million tons of oil and 500 billion cubic metres of gas.

Mr Trutnev said his ministry was analysing whether work should be suspended on several stretches of a pipeline connecting Sakhalin-2’s wells to an export terminal and the liquefied natural gas plant.

Ian Craig, Sakhalin Energy’s chief executive, insisted in a statement that any environmental damage was “essentially short-term and reversible”. He said: “There is no question of our commitment to correct any errors that we or our contractors have made.”

But Mr Belanovich took a harder line and said the violations could take up to ten years to put right. Mr Trutnev said inspections of the project would continue for another month before a final calculation of damages is made.

Sakhalin-2 has been under intense pressure from environmental regulators in what many observers see as an attempt by the Russian Government to increase state control over the country’s energy reserves.

Under the terms of the operating contract to develop the project, Russia will share in the profits only when Sakhalin Energy has recovered its costs. Shell infuriated the Kremlin last year by announced that costs had doubled to $20 billion, leading government officials to claim that the state was being robbed of billions.

The company sought to calm those fears by saying that Russia would reap $50 billion dollars from Sakhalin-2 with oil prices at $35 per barrel, and $80 billion with prices of $50 a barrel. Oil is currently about $60 a barrel. It added that 80 per cent of cost overruns would be borne by the investors, and only 20 per cent by the state.


Shell’s third-quarter figures are due out today

Consensus analyst forecasts:

Average expected earnings (profits): $5.71 billion ($7.36 billion last year)

Made up of:

Exploration & production: $3.49 billion

Gas & power: $495 million

Oil products: $1.64 billion

Chemicals: $325 million

Corporate/other industry segments: Loss of $65 million

Minority interests: Loss of $175 million,,9072-2422053.html and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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