Russia steps up pressure on Shell over Sakhalin-2

Russia has stepped up pressure on Shell by ordering a detailed environmental audit of its troubled Sakhalin-2 oil and gas project with a view to suing the energy giant for "hundreds of millions of dollars".

Although the Kremlin has toned down its threat to strip Shell of its operating licence for Sakhalin, its determination to cut itself a better financial deal appears unchanged.

Environmentalists have long argued that Shell has done too little to protect the environment in Sakhalin, a remote island in Russia's far east known for its critically endangered whales and untouched nature.

Yesterday the Russian government signalled it would be vigorously taking up those concerns and conducting a one-month audit that could pave the way for a huge damages claim.

The dispute feeds into a much broader row between Shell and the Kremlin over how Sakhalin-2 is run.

Moscow is unhappy it has no direct stake in the project that is currently 55 per cent owned by Shell with Mitsubishi Corp and Mitsui and Co owning the remainder.

It is also dissatisfied that under the terms of an agreement it signed in 1993, the Russian Treasury will not get a rouble from the project until the Shell-led consortium has recouped its costs.

In the Kremlin's eyes that day seems to be getting further and further away as Shell has admitted that the project has gone over budget and has asked permission to double its costs from $10bn to $20bn.

The Kremlin has reacted rancorously to the cost overrun and last week told Shell it would be stripped of a key environmental licence.

However, construction work on Sakhalin-2 has so far been unaffected and the licence withdrawal has not yet come into effect.

Russian politicians have since toned down the rhetoric as diplomats from the UK, the Netherlands and Japan have all lodged objections.

Diplomats from all three countries have been invited to accompany Oleg Mitvol, the deputy head of Russia's environmental watchdog, on an inspection visit to Sakhalin-2 later this week.

BP's joint oil venture, TNK-BP, is also having problems with the Kremlin. Prosecutors said yesterday they had warned the firm to remedy licence and environmental violations or risk losing the right to develop the $18bn Kovykta natural gas field in Siberia.