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RIA Novosti: Gazprom says ready to join Sakhalin II when conflict settled

19:20 | 07/ 11/ 2006 

MOSCOW, November 7 (RIA Novosti) – Gazprom is ready to join the Sakhalin II project, when cost disputes and environmental problems surrounding the vast Shell-led hydrocarbon project in Russia’s Far East are settled, a deputy board chairman of the state-controlled energy giant said Tuesday.

The multibillion-dollar liquefied natural gas project has come under attack from Russian authorities over environmental issues, and a cost estimate increase by the operator, which puts off the date on which the Russian government will receive its share of the profits.

As well as Royal Dutch Shell, which holds a 55% stake in project operator Sakhalin Energy, Japanese companies Mitsui and Mitsubishi hold 25% and 20%, respectively.

“We will be ready to resume talks with Shell and the two Japanese companies on joining the project when the two sets of issues are settled,” Alexander Medvedev said.

While reaffirming Gazprom’s interest in the Sakhalin II deposits, the official said: “The first set of issues refers to an increase in operational costs, which will inevitably influence the economics of the project, and the potential economics of our joining it.”

“The other set of issues, a more sensitive one, consists of environmental accusations… All ecological accusations have to be cleared up.”

Sakhalin Energy been accused of inflicting major ecological damage on Sakhalin, and Russian authorities said the project could be suspended in some of its sections. The operator, Sakhalin Energy, is expected to submit a plan to rectify the violations shortly.

Under the project’s product sharing agreement signed in 1994, the operator is entitled to comfortably recoup its expenses before sharing profits with the government. Sakhalin Energy has doubled its cost estimate to $22 billion, triggering protests from Russian authorities.

The Russian gas giant has been pursuing a 25+1% share in Sakhalin II, in return for a 50% stake in the massive West Siberian Zapolyarnoye-Neocomian project. But with costs on Sakhalin spiraling, Gazprom has been seeking more advantageous terms.

Some analysts have interpreted environmental authorities’ crackdown on the project as a form of pressure on the British-Dutch oil major to conclude a deal with Gazprom.

Sakhalin II 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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