Reuters: Update: Shell’s Sakhalin deal under threat

Fri Nov 10, 2006 5:01 PM GMT
By Dmitry Zhdannikov

MOSCOW (Reuters) – Russia may sue Royal Dutch Shell’s Sakhalin group in international courts to claim billions of dollars in damages or even scrap the $22 billion (11.5 billion pounds) production sharing deal, a Russian official said on Friday.

Oleg Mitvol, deputy head of environmental agency RosPrirodNadzor, said his agency had received a plan from Sakhalin-2 on how the company intended to rectify ecological damage but considered that it was “not serious”.

“We are talking to lawyers and determining our position to file for damages according to international law. The place would be Stockholm and it would be the law of New York,” Mitvol said.

The Sakhalin-2 oil and gas project has come under pressure since last year when it doubled cost estimates for the world’s largest liquefied natural gas scheme.

Shell declined to comment on Mitvol’s remarks and the fate of the production sharing agreement , which was signed in the mid-1990s when Russia was desperate to attract foreign money at a time of low oil prices.

The Kremlin is now seeking to limit foreign involvement in the strategic energy sector and has also threatened ventures involving BP and Exxon Mobil with legal and administrative measures. On Friday BP’s joint venture TNK-BP said it had paid $1.44 billion in back taxes, a source close to the company said.

The doubling of costs has infuriated Russian gas monopoly Gazprom , which was planning to take a quarter of the project, and analysts say the pressure is designed to force Shell to cede a stake cheaply, or face further delays.

PLAN “NOT SERIOUS”

Sakhalin-2 is due to supply clients in Asia and the United States from mid-2008 and Shell has said that any significant delay would damage Russia’s reputation and cost the country and the company up to $10 billion in lost profits.

The agency accuses Sakhalin-2 of polluting the bay near the LNG plant and cutting too many trees while building an 800-km (497 miles) pipeline across the Pacific island.

The Sakhalin Energy group, minority owned by Japan’s Mitsui <8031.T> and Mitsubishi <8058.T>, had earlier said it had put most of the violations right.

On Friday, it said it had this week filed an environmental action plan covering issues from river crossings to management of excavated soil. It said it would revise the plan as soon as it got the official results of site inspections.

Mitvol said he did not like the new action plan.

“It is not serious. It is a joke collection. We had expected to see technical solutions and they are dealing with small local problems such as cones collection,” Mitvol said.

Mitvol has made many strong statements about Sakhalin-2. Higher government and Kremlin officials have never tried to play them down, despite taking a softer line themselves.

Mitvol said that the longer Sakhalin-2 delayed “serious action”, the more it had to lose.

“We will insist on a detailed technical action plan from them. Otherwise around next summer we could file for PSA cancellation under the law of New York,” he said.

Under the production sharing deal, all differences must be considered by a Stockholm arbitration under the law of New York.

Mitvol said his agency was planning to demand that Sakhalin-2 compensate for ecological damage and lost profits under any scenario.

“Sakhalin Energy was quite helpful when they said lost profits could amount to $10 billion,” he said.

He said a number of Sakhalin-2 sub-contractors had already started paying for damages and had so far paid $300,000. “It is just the begining,” he said.

© Reuters 2006. All rights reserved.

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