Shell's 20-billion-dollar gas project rapped by Russian minister

Oct 25, 2006, 10:42 GMT

Moscow - Russian Natural Resources Minister Yury Trutnev on Wednesday said prosecutors would investigate environmental violations at a 20-billion-dollar Royal Dutch Shell gas operation as state monopoly Gazprom continued its talks to enter the project.

Trutnev also extended inspections on the Pacific Sakhalin Island site to month's end and gave the federal ecological watchdog four months to calculate damage costs. Citing a 'minimum' of five violations, he vowed prosecutors' involvement in two weeks' time.

Ian Craig, CEO of Sakhalin Energy, the Shell subsidiary that is developing the Sakhalin-2 deposit, said Wednesday that the project's realization would not be hindered by the investigation.

'The project's current situation will not lead to a delay in its realization,' the Russian news agency Interfax quoted Craig as saying.

The minister's warning comes against a backdrop of negotiations between Shell and Gazprom on the Russian giant's entering Sakhalin-2, which holds an estimated 500 million cubic metres of natural gas.

Gazprom is the world's largest producer of the fuel, and many analysts think the recent troubles of Shell and other Western energy majors are related to Russia's - and Gazprom's - recent increased wealth and diplomatic weight.

Balancing Russian interests with those of the Western energy companies that extract fuel from its soil is presenting an increasing number of challenges.

In an annual programme where he takes questions from people across the country, President Vladimir Putin fielded an inquiry Wednesday about balancing the interests of energy firms and the environment, posed by a woman who said she was an ecological worker.

The Russian leader told her he was concerned about problems on Sakhalin and other locations across the country.

A pipeline from Eastern Siberia to the Pacific Ocean, Putin said on national television, would be rerouted to circumvent the watershed of Lake Baikal, the world's largest freshwater body.

Noting the new route would cost an additional 1 billion dollars, Putin said, 'But we'll save Baikal. That's our national heritage.'

Trutnev, meanwhile, speaking Wednesday at a news conference in the capital of Sakhalin Island, Yuzhno-Sakhalinsk, said there were a number of areas on the island where construction of gas pipes would have to be halted, Interfax reported.

Sakhalin Energy 'does not want to cooperate ... and is not handing over requested documents,' Dmitry Belanovich, the local head of the ecological watchdog, part of Trutnev's ministry, said at the conference.

The early 1990s' so-called production-sharing agreements gave large Western oil and gas firms the right to develop fossil fuel deposits without sending a ruble into government coffers until construction costs had been recouped.

With Shell's Sakhalin-2 costs, at 20 billion dollars, twice as high as initially predicted, Russia stands to gain little from the project in the foreseeable future.

Shell and Sakhalin Energy representatives said last week that they were meeting the demands of inspection agents.

Trutnev, however, said after visiting a pipe under construction at the Sakhalin-2 project, that he had 'very many questions for the project's directors, construction companies as well as the local organs [of the watchdog], which didn't ensure timely control' over the project.