From: Associated Press
Published September 13, 2006 12:00 AM

Russia Concerned about Energy Project Costs

MOSCOW — Russia's natural resources minister said Tuesday that rising costs at a natural gas project led by Royal Dutch Shell PLC is hurting the country's economic interests.

The statement from Yuri Trutnev follows moves by environmental regulators to halt the Sakhalin-2 project over alleged ecological damage to the Pacific Island of Sakhalin.

Observers have suggested that the increased scrutiny of Sakhalin-2 is aimed at pressuring Shell to offer state-controlled gas monopoly OAO Gazprom better terms as it jostles to join what will be the world's biggest liquefied natural gas project.

"The Russian Federation simply must protect its interests," Trutnev said Tuesday, according to his ministry's statement.

The environmental watchdog, the Federal Service for the Supervision of Natural Resources, said it filed a suit last week to revoke approval for the project. It recently has ordered work on two pipelines to be stopped and threatened to pull critical licenses pending further investigation.

Last July, Shell said the expected cost of developing Sakhalin-2 had doubled to around $20 billion.

Trutnev said Tuesday that the project's cost increase would eat into the Russian government's share of profits -- a statement that appeared to signal that the lawsuit was intended to pressure the project's operator, Sakhalin Energy.

Gazprom is offering Shell access to the far northern Zapolyarnoye-Neocomian field, the world's fifth-largest gas deposit, in exchange for a 25 percent-plus one share stake in Sakhalin-2.

Gazprom argues that the cost increase has diminished the value of the stake it wants to take and wants to reduce the assets it is offering in the swap deal.

Sakhalin-2 is one of two projects in Russia's Pacific offshore being developed by Western oil companies under production-sharing agreements signed in the 1990s, and is due to come online in 2008. The other is Exxon Mobil Corp.'s Sakhalin-1 oil project, which has state-controlled oil company OAO Rosneft as a partner.

The production sharing agreements were backed by the Russian government in the early 1990s when the nation was undergoing a painful transition to a free-market economy and lacked funds to explore its mineral wealth on its own. With windfall oil revenues changing Russia's economic fortunes, some officials called for revising the terms of the agreements.

Source: Associated Press

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