Russia-UK row may be due to Gazprom expansion - chief auditor

Energy Trade

Worsening Russia-UK relations could be partly due to energy giant Gazprom's new role in the Sakhalin II project in Russia's Far East, the head of the Audit Chamber said Wednesday.

The natural gas monopoly bought a controlling stake in the vast oil and gas project late last year from Anglo-Dutch oil major Shell at a lowball price following pressure from regulators. London and Moscow are currently embroiled in a tit-for-tat row over Moscow's refusal to extradite a murder suspect. Sergei Stepashin said: "Gazprom joined the project, and this may not have pleased everyone. This must have been a factor in the harsh reaction [to the extradition refusal] from our British partners." State-run Gazprom has continued to rapidly expand its sphere of operations in Russia, and last month closed a deal to buy a 62.9% stake in Siberia's vast Kovytka gas field from British oil major BP, also for a reportedly knock-down price, in a deal reminiscent of the Sakhalin purchase.

Relations between Russia and the UK were strained at the start of last year over a spying scandal involving British embassy officials in Moscow, and later in the year by regulators' actions on Sakhalin, and the murder in London of Alexander Litvinenko, a former Russian security officer. The Litvinenko row heated up last week when London expelled four Russian diplomats over Moscow's refusal to extradite the key suspect in the case, and Moscow responded in kind. While British oil interests have been suffering in Russia, France's Total has received more favorable treatment, being picked earlier this month as Gazprom's partner to develop the huge Arctic Shtokman project in the Barents Sea. The French oil major also had its 12% cost estimate rise approved for the Kharyaga oil field it is developing in northwest Siberia. However, Sergei Stepashin said the Audit Chamber has submitted four reports to the government on environmental violations in developing the Kharyaga deposits, as well as the Sakhalin I and II projects. But he said it would be wrong to suggest that international investors do more harm than good in implementing projects on Russian soil.

Sakhalin II comprises an oil field with associated gas, a natural gas field with associated condensate production, a pipeline, a liquefied natural gas plant, and an LNG export terminal. Operator Sakhalin Energy, in which Royal Dutch Shell held a majority stake, was accused by regulators and international environmental groups of causing serious damage to the relatively un-spoiled Far East island's ecology, including deforestation, toxic waste dumping and soil erosion.

In December 2006, Gazprom reached agreement with the project shareholders on purchasing a 50% plus one share for $7.45 billion. As a result of the deal, the shares of Royal Dutch/Shell, Mitsui and Mitsubishi fell to 27.5%, 12.5% and 10%, respectively. (

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