Russia threatens Shell with 'unlimited fines' in new Sakhalin deal

Oil giant slated in green report

Tim Webb
Sunday 10 December 2006 01:00 GMT

Shell could be forced to renegotiate the terms of its involvement in the Sakhalin 2 project this week, when the Russian government publishes a damning report on the controversial $20bn (£10.2bn) oil and gas venture.

The Anglo-Dutch oil giant also faces hundreds of millions of dollars in fines. A spokesman for Sakhalin Energy, the Shell-led joint venture running the project in eastern Russia, said there was no limit on how much it could be fined.

The Ministry of Natural Resources is expected to publish the long-awaited 600-page dossier, prepared by environment watchdog Rosprirodnadzor (RPN), on Wednesday. It is expected to list alleged violations of Russian environmental regulations by Shell and its project partners.

The Russian government wants to renegotiate the terms of the deal, which Shell struck over a decade ago when oil prices were less than $20 and Russia was in chaos. It also wants Shell to sell state-owned gas giant Gazprom a stake in the project for a knock-down price. The ministry is expected to use the environmental report to press Shell to agree new terms.

Jon Rigby, an analyst at UBS, said: "The RPN report is part of the process where the Russian state and Gazprom exert pressure on Shell. The Russian government is testing the resolve of Shell to stick to the existing production-sharing agreement. At the same time, Gazprom wants to drive down the apparent value of the project as part of its tactics to buy into the venture."

A spokesman for Sakhalin Energy said the venture would rectify any environmental violations. "We are very rapid in correcting [any non-compliances] if they are identified. We have proved that."

Shell, which owns 55 per cent of the venture, angered the Russian government earlier this year when it doubled the projected cost of the project.

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