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Daily Telegraph: Shell hit as Russia suspends licence

By Russell Hotten
Last Updated: 12:19am GMT 08/12/2006

Russia has turned the screw on Shell over alleged environmental damage at the company’s Sakhalin-2 oil and gas project by suspending licences to use water. A subcontractor working for the oil giant was yesterday given two months to repair violations or see a possible halt to the $22bn (£11bn) Sakhalin venture.

Analysts had few doubts that Moscow’s move is the latest step in its plan to make Shell cede some control of the project, which is likely to generate huge revenues.

The contractor, Starstroi, was told by the environmental agency RPN that 12 licences for the extraction of water used throughout the facility had been suspended. It follows a long list of complaints by the authorities about how Shell runs the Sakhalin operation, the only major oil and gas project wholly owned by overseas investors.

Shell maintains that it has complied with every environmental request to improve conditions on the remote east-Russia island, but refuses to discuss the wider issue of Moscow’s power politics. The company was hoping that the results of an environmental audit, due to be published by RPN within the next two weeks, would give the operation a clean bill of health. But fresh claims about environment damage make this unlikely.

“It’s a significant escalation by the government,” said Chris Weafer, analyst at Alfa Bank.

Another oil expert said: “Water is essential for the facility. It may be the threat that finally forces Shell to give Moscow what it wants.”

Gazprom, the state-owned gas monopoly, was negotiating with Shell for a share of the Sakhalin project, but talks ended when the oil company said the venture would need another $10bn of investment. With oil prices hitting the $50-$60-plus range, Moscow wants a greater share of the benefits.

Shell owns 55pc of Sakhalin Energy, with Japan’s Mitsui and Mitsubishi the rest. Starstroi is half-owned by a unit of Italy’s Eni.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/12/08/cnshell08.xml

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