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Financial Times: Sakhalin-2 water permits withdrawn

By Ed Crooks in London: Published: December 8 2006 02:00 | Last updated: December 8 2006 02:00

Russian authorities have withdrawn 12 permits for water use at Sakhalin-2, the $20bn (£10.2bn) gas and oil project off the far east coast of Russia operated by Royal Dutch Shell, dealing another blow to the oil group.

The Federal Water Re-sources Agency has withdrawn the permits on environmental grounds from Starstroi, the Russian-Italian joint venture that is the lead sub-contactor in building a pipeline to carry gas across the island.

Sakhalin Energy, the joint venture running Sakhalin-2, said it was still analysing the move to see what its effect would be.

The agency suggested that work would have to stop on the pipeline while the environmental breaches were put right. However, Starstroi indicated that the effect was unlikely to be significant as most of the work on river crossings had been completed.

The move by Russia’s ministry of natural re-sources is the latest in a series of threats of sanctions against the project.

Its actions have been interpreted as attempts to apply pressure at a time when Sakhalin-2 is involved in delicate negotiations with the Russian authorities.

Sakhalin Energy currently has no Russian equity partner. It is 55 per cent-owned by Shell and the rest by Mitsui and Mitsubishi, the Japanese trading companies.

However, Shell has been in long-running talks with Gazprom, the Russian gas monopoly, over its interest in taking a stake.

The project is also waiting for a decision from the Russian authorities over its rise in costs from $10bn to $20bn.

Under the terms of the production sharing agreement signed in the 1990s, the project’s costs get recovered before most of the returns to the Russian government start to flow.

The Russians have to decide how much of the additional costs they will allow to be offset against their income under that agreement.

So far, none of the actions taken by the ministry of natural resources has caused serious delays in the work on Sakhalin-2.

Shell shares rose 3p to £18.35.

* Meanwhile, Shares in Premier Oil fell by more than 10 per cent yesterday after the oil and gas exploration and production company said it had ended takeover talks with an unnamed potential bidder, believed to be Dubai Energy.

The shares began falling on Wednesday, as rumours went through the market that the talks were not going well. After further falls yesterday the company issued a statement at midday.

However, its advisers said the announcement had not been prompted by the share price movement but followed the final breakdown of the talks yesterday morning.

Premier directors held a dinner with analysts on Wednesday night, but are not believed to have said anything about the progress of the discussions.

The shares closed down 141p at £12.05, valuing the company at £987m.

Copyright The Financial Times Limited 2006

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