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Reuters: UPDATE 4-Russian minister backs official in Shell campaign: Minister backs Mitvol

Thu Dec 14, 2006 1:57 PM ET
(Updates with reprieve for Mitvol)
By Tom Miles

MOSCOW, Dec 14 (Reuters) – Russia’s resources minister on Thursday backed environment watchdog Oleg Mitvol, who has rocked the $22 billion Shell-led Sakhalin-2 energy scheme, even after the official’s own boss demanded he be brought to heel.

News that Sergei Sai, head of the environmental agency RosPrirodNadzor, had asked Resources Minister Yuri Trutnev to formally warn Mitvol came amid signs Royal Dutch Shell is nearing a deal to cede control in Sakhalin-2 to state gas monopoly Gazprom .

Trutnev’s spokesman Rinat Gizatullin at first said Trutnev would consider the matter next week, leaving Mitvol’s future in doubt, but late on Thursday he told Itar-Tass news agency that Trutnev had given Mitvol his backing.

“The minister reviewed Sai’s submission and sent it back,” Gizatullin said. “Everyone has their faults, including Mitvol. But if all officials worked as effectively as Mitvol, a lot of things would change for the better in this country.”

Mitvol has campaigned against alleged ecological violations at Sakhalin-2, the world’s largest liquefied natural gas project. This week he threatened international damages claims of up to $30 billion against the scheme on the island of Sakhalin, just north of Japan.

But his future has been cast into doubt since he was shut out of a meeting of a sister agency last week and news broke on Monday that Shell has offered to sell control of Sakhalin-2 to Gazprom, the state-controlled gas monopoly.

Despite the bureaucratic infighting, in which Mitvol has already demanded the dismissal of Sai, one source close to the resources minister denied Mitvol was on the way out.

“His position in the ministry is very solid because, due to his efforts, the ministry has gained a new image,” the source said. “Meanwhile the minister has a lot of issues with other officials at RosPrirodNadzor, notably Mitvol’s boss Mr Sai.”

Analysts say Mitvol has been deployed by Moscow as a tool to exert pressure on Shell to cede Sakhalin-2 on favourable terms to Gazprom, which sources say could acquire 30 percent out of Shell’s 55 percent stake in the project.

Japan’s Mitsui & Co <8031.T> and Mitsubishi Corp <8058.T> may each sell 10 percent of their respective stakes of 25 percent and 20 percent, enabling Gazprom to secure a bare majority.

Mitvol was unavailable for comment on the disciplinary process but earlier on Thursday he blamed the Western media for creating uncertainty around foreign investment in Russia.

“Unfortunately, there has been speculation in the West around practically all of RosPrirodNadzor’s recent activities,” he said. “Western reporters, when they have nothing else to write about, would do better to speculate about who wants to get divorced or married.”

NO COST OVERRUN

Shell denied a report on Thursday in The Times newspaper that overall project costs at Sakhalin-2, Russia’s largest foreign investment, had risen to $25 billion.

A previous revision of estimated Sakhalin-2 project costs to $22 billion from $12 billion in 2005 infuriated Gazprom, which had then been prepared to buy 25 percent in the project.

“We deny this news. Our cost estimates have not changed,” Shell’s spokesman in Moscow, Maxim Shoob, told Reuters.

Russia, which has yet to approve the first spending increase, argues that the costs overruns would delay the moment when the country starts getting it share of profits in the production-sharing agreement with the Shell-led group.

As pressure from officials began to threaten the project’s start date for supplying liquefied natural gas (LNG) to customers in Asia and the United States from mid-2008, Shell this month offered Gazprom control in the project.

But sources said Shell wanted to remain the project’s operator despite having a smaller stake than Gazprom, partly because the Russian giant has no experience in LNG.

Russian newswires also reported this week that Gazprom may seek to pay for its stake in Sakhalin out of project cashflows after the start of commercial production, in over 20 months.

“No decision has yet been taken as to how and when Gazprom will pay for its stake,” a source close to Shell said on Thursday. Analysts’ estimates for half of Sakhalin-2 have ranged from $4 billion to $10 billion. (Additional reporting by Robin Paxton and Dmitry Zhdannikov)

© Reuters 2006. All rights reserved.

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