Russian Ministry Cancels Permits for Shell's Sakhalin-2: Ministry

An oil drilling offshore Sakhalin

The Russian ministry of natural resources said Monday it had revoked environmental permits allowing a Shell-led energy consortium to develop Sakhalin-2, a Russian oil and gas field that is the world's biggest privately funded energy project.

A spokesman for the ministry told AFP that "the prosecutor general on Saturday issued an order to cancel... the approval of the ecological assessment. We are required to fulfill this order."

The licenses was cancelled on the grounds that technical conditions were not being fulfilled, the official said.

   The three companies currently holding PSAs in Russia are ExxonMobil and Royal Dutch Shell, which are developing offshore oil and gas fields on the far eastern island of Sakhalin, and Total, which has a PSA for the northern Kharyaga oil field.

   "When violations are found in the implementation of technical plans at fields with PSAs, the ministry of natural resources considers it possible to annul extraction licenses," said Sergei Fyodorov, head of the ministry's government policy department.

   "At the present time, technical plans are not being fulfilled at a single one of the three Russian PSAs," Fyodorov said.

   "A PSA does not prevent licenses from being stripped," he added.

   All three of the companies holding PSAs have come under increasing pressure from Russian environmental authorities in recent months.

   The Russian state agency for natural resources has found a series of environmental violations at Sakhalin-2, a vast project led by Shell, and has sued to have production at the site shut down in hearings set to being Thursday.

   The ministry of natural resources has begun administrative procedures against Total for alleged violations of its license terms in developing the northern oil field of Kharyaga, Interfax reported.

   ExxonMobil's Sakhalin-1 is currently undergoing an environmental survey by the ministry, and was already criticized in a ministry report in May slamming Sakhalin-1 and Sakhalin-2 for inefficiency and cost overruns.

   The report recommended revising PSAs to give Russian energy companies majority ownership of the two projects, which analysts have said may be the real goal of pressure over alleged environmental violations.

   "What lies behind this has nothing to do with PSAs," said Al Breach, an analyst at UBS Warburg. "These PSAs were agreed at a time when Russia was weak, and the real issue is they do not have majority Russian ownership."

   Gazprom has been negotiating for a 25-percent stake in Shell's Sakhalin-2 since last year, when a preliminary asset swap agreement between the two companies broke down.

   Breach said the government's strategy of control over the natural resources sector meant the ultimate goal was majority Russian ownership -- whether state or private -- of all major energy projects.

   "Russia is strong-arming to try to force a deal that would change the ownership structure of these things," Breach said.

   Under the current production sharing agreements, the state receives a share of revenues once a company's initial investment has been paid off.

   In July 2005, Shell revised its cost estimate for Sakhalin-2 from 10 billion to 20 billion dollars (eight billion to 16 billion euros), meaning that the Russian government would have to wait far longer for its share of revenues.

 Source: AFP

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