Shell gas project could be shut down, Russian minister warns

Oct 20, 2006, 11:23 GMT

Moscow - A Russian government minister said Friday that Royal Dutch Shell's 20 billion-dollar Sakhalin-2 gas project could be stopped over what the government says are environmental violations, as state-owned Gazprom looks to muscle in on production.

'If Russian laws are broken, if damage is done to the environment, we'll take measures to stop the project,' Natural Resources Minister Yuri Trutnev said in Moscow, news agency Interfax reported.

Trutnev also said Friday that operator Sakhalin Energy had 'practically entirely admitted' that it had broken the law in its work.

Sakhalin Energy said in a statement that in one part of Sakhalin 'more than 98 per cent' of the violations the ministry found had been rectified. Shell reported earlier this week that it would present its work to the ministry October 24.

The ministry last month said that the project had damaged forests on the island and altered the seabed.

Analysts say state natural gas monopoly Gazprom's desire to push its way into the project is behind recent government pressure, manifested in a spate of environmental checks.

Chris Finlayson, head of Shell's Russian operations, said Tuesday that talks with the Russian company on its joining the project would be successful.

President Vladimir Putin aims to make Gazprom, the No. 1 global gas producer, into a national champion as his country rides eight years of GDP growth. Last week, the hydrocarbons giant said it would exclude foreign partners from its massive Arctic Shtokman field.

Through subsidiary Sakhalin Energy, Shell has been developing Sakhalin-2, the world's biggest liquid gas project, for 10 years off the coast of the far eastern Sakhalin Island. Deposits are thought to contain 500 billion cubic meters of gas.

But some Russian deputies voiced concern at the upwell of government pressure Friday at an extraordinary session of the Federation Council, the upper house of the parliament.

Agreements signed by Shell and other foreign majors in the early 1990s 'had great meaning for Russia, since they showed the openness of [the] country toward large foreign investment,' Viktor Orlov, chairman of the council's Natural Resources Committee, said.

Orlov added the government checks could turn an economic question into a geopolitical one.

Under the so-called production-sharing agreements (PSAs), Russian state coffers will not see a ruble before the project's expenses have been paid off. Shell doubled its cost estimate last year to 20 billion dollars, angering the government.

But as Russia pressures Shell - just one of a number of foreign oil majors to be threatened with environmental checks in the last month - many in the West worry that Moscow's newfound wealth may lead to it using energy to influence politics.

Gazprom in January stopped gas supplies to Ukraine in a pricing dispute. With one-quarter of Europe's gas coming from Russia, and most of it via Ukraine, waves of panic coursed through the continent.

In Moscow on Friday, Trutnev made it clear the foreign majors will continue to feel the heat.

'The economic growth of our country should be accompanied by a toughening of environmental legislation,' Trutnev said Friday.