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Shell-Led Project Warns Russia On Environmental Permit

Sakhalin-2 is the world's largest privately funded energy project designed in part to supply oil and gas for energy-short Japan.
by Staff Writers
Moscow (AFP) Sep 21, 2006
A Shell-led consortium developing the vast Sakhalin-2 energy project in Russia warned Thursday that the Russian government's move to retract an environment permit would cause "irreparable damage." The move "would lead to a significant delay in the project, extra costs and irreparable damage to the reputation of this venture, the Sakhalin region and the Russian Federation as a whole for failure to deliver gas to buyers," Sakhalin Energy said in a statement.

"Profit sharing" with Russia would also be delayed, it added.

On Monday, Russia's natural resources ministry said it had revoked a 2003 State Environmental Expert Review (SEER), adding that this would halt work on construction of natural gas infrastructure at Sakhalin-2.

The announcement provoked a wave of criticism and concern worldwide this week, including from Japanese officials and the European Commission.

But a Sakhalin Energy spokesman said Wednesday that work was continuing as normal. "As we haven't been served any official notice, the construction continues as planned," said the spokesman, Ivan Chernyakhovsky.

The project, located on an island in Russia's Far East, has attracted controversy because it falls under a production sharing agreement (PSA) concluded on what officials say were highly unfavourable terms for Russia.

Sakhalin Energy has agreed to deliveries of liquefied natural gas starting from 2008 to energy companies in Japan, which is trying to diversify supplies away from the Middle East.

Under the PSA, Russia receives a share in the profits from Sakhalin-2 on a gradually increasing scale only after the companies involved have recouped their initial investments and reached a certain level of profit.

Sakhalin Energy is 55 percent owned by British-Dutch giant Shell. Japanese firms Mitsui and Co and Mitsubishi Corp hold 25 percent and 20 percent in the project, respectively.

Japan firms seek settlement with Russia on energy project

Japanese stakeholders in the huge Sakhalin-2 energy project said Thursday they will continue negotiating with Russia after it revoked a permit in an apparent bid to reassert control over its resources.

Russia cancelled Monday an environmental permit for a Shell-led consortium to develop the fields, threatening a halt to work on the 20-billion-dollar project and sparking a sharp riposte from Japanese government officials.

Two Japanese trading companies -- Mitsui and Co and Mitsubishi Corp -- hold a 45 percent stake in Sakhalin-2, the world's largest privately funded energy project designed in part to supply oil and gas for energy-short Japan.

"We need to continue the project construction without delay," said Mikio Sasaki, chairman of Mitsubishi Corp. "It is very important for both Russia and Japan to succeed with the Sakhalin-2 project.

"We will make the utmost effort to start the operation smoothly," he said at a news conference.

"We realize the significance of the environmental issue," Sasaki said, adding: "Sakhalin Energy consortium has paid the largest possible consideration (to the environment) in its construction."

A Mitsui spokesman, who declined to be identified, said the company is asking the consortium investigate the claims made by Moscow.

Russia's cancellation of the environmental permit is widely seen as the latest example of Moscow taking a tough line to reassert control over strategic energy resources.

The two Japanese firms indicated they could consider handing over part of the ownership of the project to Russia's state-run Gazprom to persuade the Russian government to retract the cancellation.

"Nothing concrete has been decided but we are considering the possibility," said the Mitsui spokesman.

"Shell is in negotiation with Gazprom," Sasaki noted.

Shell holds 55 percent of the project which was scheduled to start shipping liquefied natural gas as early as 2008.

The Yomiuri Shimbun newspaper meanwhile reported that Mitsui, holding 25 percent, and Mitsubishi, with 20 percent, were ready to consider transferring three percent and two percent of their stakes, respectively, to Gazprom.

Shell had agreed with Gazprom in July 2005 to hand over about 25 percent of ownership but the subsequent negotiations have been stalled since.

Russian official warns Total over oil field licence

In other oil developments, Russia says it would have legal grounds to retract the licence issued to French oil giant Total to develop the Kharyaga field in northern Russia, an official warned Thursday.

"We believe that the legal basis exists for revoking the licence to Kharyaga due to the company not fulfilling the conditions of the project," Nikolai Gudkov, a spokesman for the natural resources ministry, told AFP.

The Kharyaga field currently produces around 20,000 barrels per day and has been the object of bitter dispute for years, with the Russian government accusing Total of excessive delays in completing the project.

But a spokeswoman for Total, said the company respected the rules agreed under a production sharing agreement (PSA) with the Russian government.

"We continue to say that we respect the rules of the production sharing agreement in our work," Patricia Marie said.

Gudkov said the ministry had sent material about the Total project to a committee at the federal agency for mineral resources, which would make a final decision on revoking the licence.

He said he did not know when that committee, which will include Total representatives, would meet, but stressed the licence could be revoked even though the project is governed by a PSA.

"An expert assessment shows that there is a legal basis for revoking the licence on Kharyaga even though it falls under a production sharing agreement," Gudkov said.

Total controls 50 percent of the Kharyaga oil field, Norwegian energy firm Hydro has 40 percent and local authorities in the Yamalo-Nenets province where the project is based hold 10 percent.

The move fits a pattern of Russian government pressure on production sharing agreements (PSAs) concluded with foreign companies in the 1990s, including the Exxon-led Sakhalin-1 and the Shell-led Sakhalin-2 projects.

The PSAs were agreed in the 1990s at a time of low global oil prices and a period of weak Russian government. The agreements are now seen as outdated and unfavourable to the Russian state.

Source: Agence France-Presse

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