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MarketWatch: Russia’s environmental watchdog to file lawsuits on Sakhalin-2

Last Update: 5:50 AM ET Dec 12, 2006

MOSCOW (MarketWatch) — Oleg Mitvol, the deputy head of Russia’s environmental watchdog Rosprirodnadzor, said Tuesday his agency would file lawsuits against foreign companies developing the Sakhalin-2 oil and gas project in the spring of 2007, Russian news agency Interfax reported.

Mitvol said his agency plans to file suits in Russian courts and in Stockholm around March.

Mitvol said that a preliminary assesment of the damage to Sakhalin Island inflicted by the Sakhalin Energy Ltd. consortium and its subcontractors was around $10 billion, although Mitvol has cited figures as high as $50 billion.

Mitvol said Rosprirodnadzor will present a full account of environmental damage to the resource-rich Sakhalin Island by late summer 2007, an apparent delay of some nine months from the original target date.

In early autumn of this year, Russian Minister of Natural Resources Yuri Trutnev asked Rosprirodnadzor to present a complete account of the damage to Sakhalin, an island off Russia’s Pacific coast north of Japan, by this November.

Mitvol’s announcement Tuesday came after Royal Dutch Shell PLC (RDSB) offered Russian natural gas giant OAO Gazprom (GSPBEX.RS) control over Sakhalin Energy on Friday, in a move widely seen as an attempt by Shell to kick-start development of the troubled project. Gazprom has so far yet to respond to the offer.

Russian regulators – led by Mitvol himself – have led a crusade against Sakhalin Energy over alleged environmental infractions.

Many analysts, however, see the campaign as a bid by the Russian state to increase its control over the project, and to increase the state’s portion of the proceeds from the Sakhalin-2 development.

“I think we should be ready by the beginning of March to start the legal process,” Mitvol said.

Sakhalin-2 is being developed under a production sharing agreement, or PSA, which states that differences between shareholders and the Russian state are to be arbitrated in a court in Stockholm.

Mitvol also said he intended to begin an inspection of Sakhalin-1, which is operated and 30%-owned by Exxon Mobil Corp. (XOM), in January.

Observers who believe the intense regulatory pressure being placed on Sakhalin-2 is, in essence, a hardball commercial bargaining tactic, also view Sakhalin-1 as largely insulated from the intrusive inspections of state environment officials.

The Sakhalin-1 oil and gas consortium already has a major Russian shareholder – the state owned OAO Rosneft (ROSN.RS), which is seen as close the Kremlin. Sakhalin-2 is the only major oil and gas project currently being developed in Russia that doesn’t have a Russian shareholder.

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