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The Guardian (UK), October 22, 2003

Kremlin threatens to stop Shell drilling
Ecology minister voices concern amid anger at oil pipeline

By Nick Paton Walsh

Shell could lose its licences to drill for oil in Russia, after an investigation by the country's ministry of natural resources - responsible for the ecology and exploitation of vast oil and gas fields - said it had reason to file a number of complaints.
Vitali Artyukhov, the natural resources minister, said that the ministry's "control bodies are continuing a planned investigation into all fields where Royal Dutch/Shell is working".

These include the £6bn Shell-dominated work on the far-eastern island of Sakhalin, a former tsarist penal colony being transformed by foreign investment into a huge gas energy project.

Locals and ecologists say that the oil giants are not giving enough back to the community and are ruining their coastline.

Mr Artyukhov did not specify the nature of his objections, but said: "Based on the ministry's information, we can expect a number of new complaints, right up to bringing up the question of withdrawing licences."

He insisted the ministry was being "absolutely impersonal and objective". His office declined to comment further.

While the Kremlin is unlikely to suspend an energy deal from which it will receive an estimated £29bn in commission payments, the ministry's complaints may lead to a complicated renegotiation of the terms of the project.

Shell declined to comment, despite repeated calls.

The Anglo-Dutch giant has come under heavy criticism since deciding that the huge pipeline that will carry Sakhalin's oil and gas to the island's southern coast, for shipping to Japan and elsewhere, should be built underground. Sakhalin is prone to earthquakes, and ecologists fear environmental disaster.

Locals also feel aggrieved that the foreign investment on the island, which could total £18bn, has yet to have any impact upon high poverty levels.

Sakhalin Energy, the Shell-dominated consortium behind the project, invested £6bn in the island, the largest foreign investment in Russia to date, and stands to make hundreds of billions of dollars.

The contract states that 70% of the labour and goods used should be Russian, yet the company has accepted it has yet to fulfil this condition.

The ministry cleared yet another big Shell investment in Russia last week, after a meeting between the chairman of Shell, Sir Philip Watt, and the Russian president, Vladimir Putin.

This £600m investment in the Siberian Salym oilfield came after months of wrangling between Shell and the ministry over unspecified production and exploration targets.

Some analysts dismiss the ministry's complaints as part of protracted contractual brokering.

Shell was not the only western giant threatened by the minister in a wide-ranging attack that will worry foreign investors in Russia.

Despite the image of Russia as a place where the west can now do business, the comments will be interpreted by some analysts as an attempt to rewrite Russia's contracts with the companies once they have been signed.

Mr Artyukhov also criticised the US giant ExxonMobil, which is rumoured to be on the brink of buying a £15bn 40% stake in Russia's biggest company, oil giant Yukos.

Russia's richest man, Mikhail Khodorkovsky, an opponent of Mr Putin, owns Yukos and would benefit substantially from the US investment.

Some of the Russian media said Mr Artyukhov's outburst may be linked to the ongoing spat between Mr Khodorkovsky and the Kremlin.

ExxonMobil is also a heavy investor in Sakhalin, and has also been criticised for its ecological record there.

Mr Artyukhov said: "We have serious complaints about many well-known companies, in particular regarding ExxonMobil concerning its work [on Sakhalin]. The ministry can not bypass serious mistakes made by that company ..."

He added that another project on Sakhalin in which ExxonMobil is also set to invest "looks even worse to us", accusing the company of an "unwillingness to listen to the opinion of the Russian side".

The minister hinted at what may be driving Moscow in these negotiations when he said: "This brings us back to the same question: is it necessary to hold a new tender to develop [this new Sakhalin project] under regular taxation conditions?"

 

See also:

Production Sharing Agreements (PSA)

The Guardian (UK), October 22, 2003

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