Ecological violations halt work at Shell project in Russia

Dec 7, 2006, 11:24 GMT

Moscow - Work was stopped at Royal Dutch Shell's 20-billion-dollar oil and gas project off Russia's Pacific coast after ecological authorities on Thursday said they had revoked 12 licences for the project.

Violations of water legislation at Sakhalin-2 led to the temporary withdrawal of the licences, all for water use, Russia's Natural Resources Ministry said in a statement.

Startstroi, general contractor for the project, was given two months to fix the violations, after which the licences would be annulled, the statement said.

The ministry said the licences were withdrawn after pipe-laying work violated parts of Russia's Water Code. It also cited earlier ecological violations at the Sakhalin Island development.

Sakhalin-2 is one of the world's largest hydorcarbons projects, and the licence revocation, expected to bring construction of Sakhalin-2's above-ground pipeline system to a halt, was the latest in a string of problems the project has faced in recent months.

Shell and other Western companies have come under fire for allegedly breaking environmental laws this fall, with Sakhalin-2 having temporarily lost another licence in September.

Many of the firms are pumping oil and gas under so-called production-sharing agreements (PSAs) signed in the 1990s that gave private companies large amounts of control over their projects - and which are no longer palatable for a stronger Russia.

Observers have said the increased pressure may be directed toward Shell giving Russia's gas monopoly, Gazprom, a large stake in the project. The two companies are currently in talks to open Sakhalin-2 to Gazprom participation.

Sakhalin-2 has also been cited for cost overruns, which under the terms of its PSA means Moscow will have to wait longer until construction costs are recouped and it can begin to collect its share of the profits.

Natural Resources Minister Yury Trutnev said Tuesday in that Shell had 'barbarically' violated environmental legislation at the site and would be forced to pay a fine to be determined by mid-2007.

The ministry has said Shell's project has damaged the fragile Pacific seabed around Sakhalin, endangered native whale and fish popultions and illegally cut down trees on the island, among other things.