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The Scotsman: Shell warns Russia may cause Sakhalin-2 delay

Wed 13 Dec 2006

MOSCOW (Reuters) – Pressure from Russian authorities is beginning to threaten the timetable of the Shell-led Sakhalin-2 oil and gas project, the venture’s operator said on Wednesday.

The Natural Resources Ministry has mounted a campaign of inspections by environmental agency RosPrirodNadzor and threats of administrative sanctions against Sakhalin-2, the only big Russian energy project entirely in foreign hands.

Partly as a result, a deal is taking shape for Russian gas export monopoly Gazprom to buy into the scheme that includes the world’s biggest liquefied natural gas (LNG) project, which is due to start supplies to Japan, South Korea and the United States in mid-2008.

“The activity of the regulatory bodies who are slowing down the process of getting an agreement is beginning to have an effect on the project,” Igor Ignatyev, vice president of the operator, Sakhalin Energy, told reporters.

“In January we are due to start drilling at the Lunksoye field, but for more than two months we haven’t been able to get RosPrirodNadzor to send its agreement for the start of drilling.

“The (Lunskoye) timetable is no longer realistic. It will be a serious factor in keeping to project deadlines.”

Russia’s water resources agency has suspended 12 water-use licences held by Sakhalin-2’s main contractor — Russian-Italian joint venture Starstroi — and given it two months to put the violations right.

On Wednesday, Interfax news agency quoted the agency’s head Rustam Khamitov as saying he doubted the contractor could rectify the violations and the licences would be suspended.

This would prevent the group from finishing pipelines linking gas fields in the north of Sakhalin island with the liquefaction plant in the south.

Analysts say pressure from the state, notably from RosPrirodNadzor official Oleg Mitvol, is part of a wider drive to increase Kremlin control over the strategic energy sector.

SERIOUS AND STRATEGIC

“Everybody is speaking about the company’s activities, but nobody raises questions about the personal responsibility of officials in this project, which is very serious and strategic for Russia,” Ignatyev said.

Mitvol has also threatened other energy companies and has this week turned his spotlight on London-listed gold mining firm Peter Hambro . Its shares fell nearly 20 percent after Mitvol said he was checking all the firm’s licences.

Gazprom is in talks with Shell to buy into Sakhalin-2, the biggest single foreign investment in Russia.

Industry sources have told Reuters it will take a controlling stake in the project, although other sources have said Shell will remain the project operator.

Shell’s Japanese partners Mitsui <8031.T> and Mitsubishi <8058.T> may also sell Gazprom a 10 percent stake each.

Shell’s troubles began last year when it doubled its cost estimate for Sakhalin-2 to $22 billion (11 billion pounds) days after reaching a preliminary swap deal which would have brought Gazprom in as a 25 percent shareholder.

The cost increase infuriated Russian officials and forced Shell back to the negotiating table with both Gazprom and the Kremlin, which needs to agree changes in the project budget.

Shell plans to tie up all the threads of the scheme at once.

“No single element can be agreed in isolation from the whole. People might think you can chop it up into different pieces, but that’s not going to happen,” Shell spokesman Alf D’Souza told Reuters on Monday.

(c) Reuters 2006. All rights reserved.

This article: http://business.scotsman.com/latest.cfm?id=1851872006

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