RUSSIA’S SAKHALIN-2 PROJECT REMAINS UNDER PRESSURE

Russian officials have made little secret of their unhappiness over the terms of existing production sharing agreements, notably Sakhalin-2. Russia refuses to foot the Sakhalin-2 cost overruns, according to Russian Industry and Energy Minister Viktor Khristenko. He argued that doubling the project’s spending estimate would cost Russia billions of dollars. Khristenko also indicated plans to make a decision on the Sakhalin-2 budget in the first quarter of 2007 (RIA-Novosti, December 12).

In response, Sakhalin Energy vice-president Igor Ignatiyev reportedly indicated that ongoing delays could further raise Sakhalin-2 cost estimates up to $25 billion. He also said that liquefied natural gas (LNG) supplies are no longer expected to start flowing in September 2008 (Itar-Tass, The Times, December 14).

Following an unprecedented legal onslaught, earlier this month Sakhalin-2’s major shareholder, Shell, indicated its willingness to allow Gazprom to snag a 50% plus-one-share stake in Sakhalin-2, either in a cash transaction or a swap of assets. However, the Russian gas giant Gazprom was understood to be pursuing cheaper options to acquire a controlling stake in Sakhalin-2.

Gazprom could opt to pay for the Sakhalin-2 stake through future revenues from the Sakhalin-2 project itself, the Russian RBC business daily commented on December 13. The Russian gas monopoly is also likely to pay less than the estimated $5.7 billion value of a 50% stake in Sakhalin-2, the daily claimed.

Furthermore, Russian lawmakers appear to be preparing to give the country’s state-controlled energy firms yet another boost. On December 22, the Russian State Duma, the lower house of parliament, is expected to approve a draft law on pipelines. The draft would not allow any major gas pipelines to have less than 50% state ownership, and major oil pipelines would need to be at least 75% state-owned. Foreign companies could control no more than 20% of these pipelines.

The new pipeline legislation is understood to be aimed at further boosting the government’s already dominant influence in the energy sector. The bill is expected to become effective in 2007, but it would not require the nationalization of the existing pipelines, including those of Sakhalin Energy.

Gazprom initially advocated the new regulations back in 1999, but the bill took more than seven years to materialize. In the aftermath of Yukos head Mikhail Khodorkovsky’s 2002 attempts to start building private pipelines, now Russia is about to ban pipelines not controlled by the government (Kommersant, December 13).

Moscow appears to be implying that only it can safeguard the Russian environment against profit-hungry foreign companies. Irregularities in pipeline construction featured prominently in the Russian Natural Resources Ministry’s efforts to crack down on what it described as massive violations of environmental legislation. Notably, earlier this month the regional department of Russia’s water resource agency, Rosvodresursy, suspended 12 licenses for the use of water resources issued to Starstroi, an oil pipeline subcontractor for Sakhalin Energy.

Rosvodresursy head Rustem Khamitov indicated that his agency could cancel Starstroi’s licenses in February 2007. He accused the Sakhalin contractor of “barbarous” pipeline construction over protected rivers. Khamitov also said that since December 5 Rosvodresursy had quintupled the water tax levied on Starstroi as a penalty for the violations (RIA-Novosti, December 13).

Rosvodresursy, part of the Russian Natural Resources Ministry, suspended the licenses on December 5. Rosvodresursy has given Starstroi until February 6, 2007, to correct the violations or face the revocation of the licenses.

The Sakhalin Energy consortium is developing the Sakhalin-2 oil and gas project. On September 18, the Natural Resources Ministry accused Sakhalin Energy of environmental violations near Sakhalin and revoked its own 2003 environmental approval.

In late November, the Natural Resources Ministry’s environmental watchdog, Rosprirodnadzor, completed a two-month environmental audit of the Sakhalin-2 project. Earlier this month, Rosprirodnadzor deputy head Oleg Mitvol had claimed the violations were so significant that Rosprirodnadzor would turn to the Stockholm arbitration forum to demand up to $30 billion in compensation from Sakhalin Energy.

Meanwhile, the Natural Resources Ministry’s environmental activism has sparked controversy inside the ministry itself. Natural Resources Minister Yuri Trutnev and Mitvol publicly criticized Rosprirodnadzor head Sergei Sai for weak enforcement of environmental legislation. On December 14, Sai formally approached Trutnev and suggested he either fire or reprimand Mitvol. But Mitvol responded bluntly that he had outlasted Sai’s three predecessors, while Trutnev refused to take any action against Mitvol (Interfax, RIA-Novosti, December 14).

Russia’s Natural Resources Ministry has also sought direct assistance from law enforcement agencies. The Ministry should coordinate efforts with the Prosecutor General’s Office to improve environmental protection, Trutnev told a meeting in Moscow on December 8. Russia’s regulatory enforcement and controls have been weakening, allowing serious violations at Sakhalin-2, Trutnev said. Prosecutor General Yuri Chaika agreed that oil and gas companies have committed “massive” violations of Russian environmental laws (Interfax, Itar-Tass, RIA-Novosti, December 8).

However, the Russian authorities appear to sound more positive about another Sakhalin production sharing agreement. On December 14, the Russian authorities approved a $1.2 billion spending program for Sakhalin-1 project in 2007, Deputy Industry and Energy Minister Ivan Materov announced. The Russian government also approved $6.5 billion already spent on the program to develop Sakhalin-1’s Chaivo deposit, the ministry said (Interfax, December 14).