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UpstreamOnline: Sakhalin Energy in spotlight

Russian environmental watchdog Rosprirodnadzor has tackled Sakhalin Energy over its refusal to pay $17 million in compensation for environmental damage caused during work on the Sakhalin 2 oil and gas project in the country’s far east, writes Vladimir Afanasiev.
Rosprirodnadzor submitted the claim to the company in December to make restitution for the destruction of forests during the building of oil and gas pipelines on Sakhalin Island.

However, the operator has refused “to pay it voluntarily”, a Rosprirodnadzor official was reported as saying.

The official added that it made “no difference” that Russian gas monopoly Gazprom now owns a controlling stake of 50% in the Sakhalin 2 project as environmental violations still have to be stamped out.

Rosprirodnadzor launched its offensive against Sakhalin Energy in 2006 when supermajor Shell held a 55% stake in Sakhalin 2.

Agency deputy head Oleg Mitvol inspected construction work on oil and gas pipelines running from the north to the south of the island, carried out by Russian contractors hired by Sakhalin Energy.

Following that inspection, Mitvol said he assessed the environmental damage from the building work at $50 billion.

A Sakhalin Energy spokesman said the company would only comment on the claim when it receives confirmation from a court to which Rosprirodnadzor filed a claim against the operator.
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28 March 2008 00:01 GMT  | last updated: 28 March 2008 00:01 GMT

Related article: Shell-led group dragged into mud over environmental concerns

By Upstream staff

Sakhalin Energy, operator of the Shell-led Sakhalin 2 oil and gas development, has suddenly been dragged into a battle with Russia’s environmental watchdog Rosprirodnadzor (RPN), with Phase 2 of the project less than two years from completion, writes Vladimir Afanasiev.
At the beginning of November, the company had finished correcting 99% of “deficiencies that were picked up during August and September inspections by RPN”, according to Phase 2 project director David Greer.

RPN representatives carried out inspections this summer on about 150 kilometres of oil and gas pipelines that are being built on the Makarov ridge.

Phase 2 is to include two parallel pipelines one to take oil and the other to take gas from the north to the south of the island to transport output to an LNG plant and LNG and oil export terminals near the port of Prigorodnoye.

Greer says: “Makarov has a difficult countryside. Slopes are really steep and the composition of the soil is difficult, it is not the easiest material to handle.”

In addition, there are possibilities of mud slides and numerous river and spring crossings.

RPN lambasted Sakhalin Energy and Russian pipeline contractor Starstroi for failing to take measures to protect mud from getting into rivers, which serve as spawning grounds for salmon, an important commodity for the island where one third of the population is estimated to be involved in fishing.

RPN also criticised the company for failing to implement soil erosion control, and for dumping excavated soil into a nearby forest.

On 24 August, RPN ordered the company to take 19 corrective measures. However, that was just the beginning, with various governmental officials, including RPN deputy head Oleg Mitvol, flying to Sakhalin to visit the construction sites for the pipeline, LNG plant and terminal. In September, Russia’s Natural Resources Ministry called for a new one-month audit of Phase 2 activities.

This audit, which was due to finish on 22 October, was extended until 25 November during a one-day visit by Russian Natural Resources Minister Yuri Trutnev to Yuzhno-Sakhalinsk at the end of October.

Company officials have said that Sakhalin Energy will “address all actions and observations after the completion of this new audit”. Greer says that the company has so far focused its efforts on erosion control and land reinstatement.

The construction of pipelines is being managed by Starstroi, a joint venture between Italy’s Saipem and Russia’s Global Engineering.

From its side, Starstroi has brought in 14 sub-contractors to ensure that about 1600 kilometres of oil and gas pipelines are laid by end of this year.

Greer says that “there have been some good, bad and ugly experiences” with sub-contractors, some of which did not expect to meet wet andsoft soil on Sakhalin Island after working on the frozen ground in West Siberia.

“We are working with Starstroi to send some contractors back home,” Greer says.

“These deviations should have not occurred at all. We are doing everything we can to ensure these weaknesses in the management of sub-contractors are tightened,” he adds.

Despite Trutnev’s criticism of the Phase 2 building activities, Greer rules out any possibility of a “large-scale stoppage” in Phase 2.

“We are like a race horse at the moment,” he claims.

He says nothing could stop them from completing the project and starting first LNG shipments by September 2008 at the latest.

“Any stoppage will have a much more negative impact on the environment than any violations that the company has been accused of,” Greer adds.
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24 November 2006 00:01 GMT  | last updated: 24 November 2006 12:20 GMT
 
Related article: Shell ready to pay up at Sakhalin

By Upstream staff

Shell-led Sakhalin Energy has confirmed its willingness to compensate for any environmental damage caused by the Sakhalin 2 project in Russia’s far east, writes Vladimir Afanasiev.

Sakhalin Energy chief executive Ian Craig told reporters after he met with Russian Natural Resources Minister Yuri Trutnev that “if the Russian authorities come to the conclusion that the damage to the environment from construction activities exceeds the anticipated impact, the company will pay compensation”.

However, Craig expressed some doubts that the damage is close to $100 million, the amount claimed by temporary head of the Sakhalin branch of the country’s environmental watchdog Rosprirodnadzor (RPN) Dmitry Belanovich.

Last month, RPN’s deputy head Oleg Mitvol alleged that the damage to Sakhalin’s environment totalled $50 billion.

During his two-day visit to Sakhalin, Trutnev inspected oil and gas pipeline construction work and met local government officials and Sakhalin Energy.

After a helicopter flight over the pipeline route, Trutnev told reporters that “breaches at Sakhalin 2 fall under five articles of Russia’s criminal code”.

“All the relevant documents should be sent to the Prosecutor General within two weeks,” he added.

Still, Trutnev said that “it is not right to halt all work” on Sakhalin 2’s second phase, saying a stoppage will be required in just “some areas”.

Nonetheless, the minister hit out at the project operator, saying Sakhalin Energy “implements the construction in an ugly way”.

“It is not clear to me why this company has decided it is above the law,” he added.

Meanwhile, in Moscow, Mitvol told Ekho Moskvy radio that “RPN will withdraw the water usage licence from Sakhalin Energy”.

“Without this licence, construction will not be possible,” he said.

Putin steps up pressure on Sakhalin: Page 33
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26 October 2006 23:01 GMT  | last updated: 26 October 2006 23:01 GMT

Related article: Shell is circling the Sakhalin wagons

By Upstream staff

Russian President Vladimir Putin is taking a calculated gamble with his roughhouse tactics on Sakhalin Island, which formerly hosted Soviet and Czarist labour camps. This time the potential victims are not political dissidents but foreign oil companies.

His smooth-talking personal secretary was in London denying there was any plot to oust Shell from control over the world’s biggest liquefied natural gas project, but few in the West will give him the benefit of the doubt.

Many equity analysts and energy industry academics in Moscow believe the Kremlin’s stance on Sakhalin 2 is connected with the wider push to seize back control of oil and gas assets handed over on the cheap when prices were low.

There has always been an ambivalent attitude in Russia to whether the country should pay lip service to Western sentiment.

The country has struggled to decide whether it is part of Europe or Asia, even though Peter the Great tried to anchor it culturally in the former by building a Venice of the north in the city named after him, now St Petersburg.

Putin argues that Russia is already part of the West and says he wants more interdependence between the two sides through deeper co-operation between energy providers – such as Russia – and customers in continental Europe.

His secretary, Dmitry Peskov, also insisted once again that the country is still keen to attract foreign investment and claims the Kremlin would not willingly jeopardise that by upsetting Shell at Sakhalin, or for that matter BP at Kovytka where the Russian authorities have threatened the UK supermajor’s local subsidiary TNK-BP with the withdrawal of the exploration and development licence for the East Siberian gas field.

The problem is that endless threats against Shell from Oleg Mitvol, the pugnacious spokesman for the state environmental watchdog Rosprirodnadzor, inevitably look designed to help state-owned Gazprom gain a stake in Sakhalin 2.

But, asked Peskov, why should the US and the West take the environment seriously and not Russia? Why should the US government be praised for going after BP in Alaska for pipeline spills and yet Moscow criticised for not trying to enforce the rules at Sakhalin, where Shell has admitted some environmental violations?

The problem with that argument is that Russia has a poor record on protecting the environment, which was barely considered under the Soviets’ industrialisation plans and has not been top of the agenda as the country seeks to get its economy back on track since Putin took over.

Western non-governmental organisations have endlessly criticised Shell over Sakhalin but have not received any help from Russian officials, until this summer when Gazprom started to push hard for a stake in Sakhalin.

The pressure on Shell and its Japanese partners, Mitsui and Mitsubishi, has also intensified since a doubling of costs on Sakhalin has driven up the total bill for the project to about $20 billion and left the Russian government waiting longer for major tax revenues from there.

It’s a delicate balancing act for the Kremlin, which knows Gazprom will not be able to serve existing customers – never mind any new ones – unless it pumps cash into new projects. Some analysts believe there will be an annual gas deficit of 126 billion cubic metres within the next five years and buyers could face shortages this winter.

Shell accepts internally that a Russian partner is the only way to ensure the Sakhalin scheme will keep to its 2008 start-up date, but insists it is not going to hoist the “white flag” and surrender without a clean settlement. That means it will hand over a stake in Sakhalin to Gazprom for a fair price and with a deal on cost overruns and how the environmental problems will be resolved, without ludicrous $30 billion claims being demanded by Rosprirodnadzor.

To ensure that foreign oil companies and their investors do not jump to negative conclusions about the rule of law being completely absent in Russia, an equitable deal on Sakhalin needs to be drawn up. Shell must not become a prisoner on Sakhalin Island.
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15 December 2006 00:01 GMT  | last updated: 19 December 2006 08:32 GMT

Related article: Russia runs rule over one-stop watchdog

The Russian government is considering adding more power and functions to environmental watchdog Rosprirodnadzor, writes Vladimir Afanasiev.
The government is also looking at making it a standalone department, according to industry insiders in Moscow.

Rosprirodnadzor is currently technically a subsidiary of the Russian Natural Resources Ministry, which is headed by minister Yuri Trutnev.

Last week, Russia’s First Deputy Prime Minister Dmitry Medvedev told a meeting in the Kremlin that the authorities “must determine which of the existing bodies will be central in environmental matters”.

Insiders have interpreted Medvedev’s words as showing the government is looking at creating a separate standing service that will take over environmental responsibilities from Rosprirodnadzor, Rostekhnadzor and several other departments in the government that monitor environment protection.

Rosprirodnadzor head Sergei Sai and his deputy Oleg Mitvol have submitted their resignations to Trutnev, in an apparent move to enable them to play a role in any new environmental watchdog.

However, Trutnev has only accepted the resignation of Sai, nominating the former deputy governor of the region of Leningrad, Vladimir Kirillov, to replace him.

Kirillov is widely considered to be a secret service officer with good ties to Prime Minister Viktor Zubkov.

Moscow business daily Kommersant has said that the government is discussing promoting Kirillov from Rosprirodnadzor to become the head of the new environmental service. The Russian Security Council, led by President Vladimir Putin, is expected to meet at the end of this month to discuss the outline of such an agency.

The fate of Mitvol remains unclear at the moment. He has been quoted as saying only that “he would support a decision to create a single environmental agency”.

Mitvol was seen as being behind Rosprirodnadzor’s crackdown on the Shell-led Sakhalin 2 project and UK-listed companies Imperial Energy, Urals Energy and Arawak Energy in the last two years.
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25 January 2008 00:01 GMT  | last updated: 25 January 2008 09:15 GMT

Related article: Pipeline work ‘wreaked environmental damage’

By Upstream staff

Russian pipeline contractor Starstroi, a joint venture between the country’s Lukoil-Neftegazstroi and Italy’s Saipem, has denied that it inflicted irreparable damage to the environment of Sakhalin Island during building of onshore oil and gas pipelines for the Shell-led Sakhalin 2 development, writes Vladimir Afanasiev.

According to a September report from Russia’s technical compliance watchdog Rostekhnadzor, a copy of which was obtained by Upstream, Starstroi committed various environmental violations during the construction work.

These included shutting the flows of various springs and small rivers, dumping soil and polluted waters into nearby forests and failing to take protection measures against erosion and potential mud slides, the report said.

Rostekhnadzor deputy head Oleg Mitvol levelled these accusations against operating company Sakhalin Energy this week. He told reporters in Moscow that “Sakhalin Energy has a licence to produce oil and gas on Sakhalin but it has no right to kill the nature”.

Mitvol said the company must halt work immediately and its licences have to be withdrawn.

Starstroi deputy general director Vladimir Kukharev said that the pipeline is still under construction, and the company will take measures to restore normal flows of springs and rivers immediately after the pipe is buried in the ground.

However, Greenpeace energy co-ordinator in Moscow, Ivan Blokov, said that the blocking of fish-spawning rivers for one season inflicts such large damage to the fish population that it could take “dozens of years” to restore it.

Blokov emphasised that the majority of the Sakhalin population depends on fishing as its main source of income.

Kukharev has acknowledged that the company agrees with Rostekhnadzor on “most points”, but it insists that any potential mud slides will not rupture the pipeline because it will be in the ground at a depth of between five and 10 metres.

Starstroi has to lay two pipelines one for oil and the other one for gas over about 800 kilometres from the north to the south of the island.

Kukharev said that certain deviations from the initial engineering plan are possible because the construction “has been very challenging, given that the contractor has had to lay the pipeline across 20 tectonic breaks, 120 zones prone to mud slides and over 1000 springs and rivers”.

Earlier this week, Russia’s Natural Resources Ministry accused Sakhalin Energy of failing to address these challenges in its development plan endorsed by Russian scientists in 2003.
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21 September 2006 23:01 GMT  | last updated: 21 September 2006 23:01 GMT

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