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Last Updated: Monday, 25 September 2006, 15:16 GMT 16:16 UK
Russia's Sakhalin stance queried
Oil platform off Sakhalin island
Shell has said the project continues to go ahead as planned
Russia is under growing international pressure to explain its stance on the Sakhalin-2 energy project amid a political row about its development.

Russian officials have launched a full environmental review of the $20bn oil and gas scheme led by Shell, having withdrawn a key permit this month.

British, Dutch, Japanese and US officials have raised concerns about the project's long-term prospects.

Critics say Moscow wants to muscle in on the strategically-important scheme.

Questions asked

Due to be finished in 2008, Sakhalin-2 will be the largest integrated oil and gas field in the world.

Sakhalin Energy, the consortium developing the scheme, says work is continuing as normal despite concerns over the project's viability and mixed signals on the issue from within Russia.

We are seeing the Russification of the strategic energy assets
Martin Taylor, Thames River Capital

Natural Resources Minister Yuri Trutnev said his department would investigate the project's environmental safegaurds, but said the legal basis of the project was not under threat.

"There is no question of removing the licence because of the results of the investigation," he said.

"Our goal is not to get involved in the economics of the project. That is a question for other bodies in the executive branch of government."

Foreign governments are concerned by speculation that Moscow may seek to have key contracts renegotiated or use licensing delays to exert pressure on the developers to hold fresh talks with Russia's Gazprom.

Gazprom is interested in investing in the project but talks with Shell and its other Japanese investors have stalled since it emerged that the cost of the project had spiralled to $20bn.

British foreign secretary Margaret Beckett
Margaret Beckett challenged her Russian counterpoint over the issue

Under the terms of contracts signed in the 1990s, Moscow will not gain financially from the project until developers have recouped their costs.

The more the project costs, the longer this will take.

British Foreign Secretary Margaret Beckett has raised the matter with Russian officials, while Dutch Prime Minister Jan Peter Balkenende phoned Russian President Vladimir Putin to express his concerns.

Mr Putin has resolved to settle any differences constructively, although the Kremlin is reported to have been furious about the cost over-runs.

Russian Finance Minister German Gref has said existing contracts should be honoured.

'No surprise'

Uncertainty also surrounds the future of licences awarded to the more advanced Sakhalin-1 oil project, whose investors include ExxonMobil.

Analysts said Russia's actions were in keeping with its efforts to wrest control of energy assets "lost" during the privatisation spree of the 1990s.

"We are seeing the Russification of the strategic energy assets," said Martin Taylor, a hedge fund manager at Thames River Capital.

"Whilst distasteful, none of this has been a surprise for anyone following the increase in Russia's growing control of energy assets."

But most experts believe the project's politically-sensitive nature and Russia's desire to maintain its investment reputation abroad means the dispute will eventually be settled.




SEE ALSO
Japan warns Russia over Sakhalin
19 Sep 06 |  Business
Shell faces more Russian pressure
18 Sep 06 |  Business
Sakhalin gas project under fire
05 Sep 06 |  Business
Oil giants set sights on Sakhalin
14 Sep 05 |  Science/Nature

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