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Russia told Shell to suspend Sakhalin Pipeline work

Royal Dutch Shell Plc was told by the Russian government to suspend construction of a pipeline on Sakhalin Island, threatening to delay a project whose costs doubled last year to $20 billion. The Natural Resources Ministry said yesterday that Shell should stop construction of the link until it can complete environmental and safety studies at the end of the month. The government plans to sue the company to enforce the demand, said Oleg Mitvol, deputy head of the ministry's environmental monitoring agency. A delay would risk augmenting costs on the project, the biggest foreign investment in the country, and might strengthen the hand of Russia's state-run OAO Gazprom as it seeks to obtain a stake in the venture. President Vladimir Putin has used the natural gas producer and OAO Rosneft to tighten his control over the nation's energy resources. „Shell is talking to Gazprom about allowing Gazprom into the project and this could easily be, in Russian style, part of the negotiation tactics,” said Craig Pennington, global leader of energy research at Schroders Plc in London. „The cost is large and it's an incredibly complicated pipeline. I can't imagine them ripping it all up.” Gazprom and the ministry denied any link between yesterday's complaint and the Russian gas company's bid for a stake in the Sakhalin project, in the country's far east.
The venture includes Russia's first liquefied natural gas export plant at the southern end of Sakhalin Island. The plant needs the pipeline to bring in gas from fields further north, where ice flows make shipping difficult in the winter. Environmental groups seeking to protect whales and salmon have already forced Shell to redesign and reroute onshore and offshore pipelines as part of the second-phase of the Shell-led Sakhalin-II project (for Sakhalin Energy Investments Co.). Shell has struggled to boost its production and reserves amid cost overruns or delays at several major projects, including the Bonga deepwater oil field in Nigeria, which started in November, two years behind schedule.
Sakhalin Energy Investment is 55% owned by Shell, 25% by Mitsui & Co. and 20% by Mitsubishi Corp. Shell and state-run Gazprom are negotiating a swap that would give Gazprom at least 25% of the project in return for Shell taking a 50% stake in Russia's Zapolyarnoye field in Siberia.
Sakhalin Energy already sells some oil during summer months from the first phase of the project, and plans to start its first LNG deliveries in the summer of 2008. It has already sold „virtually all” of the 9.6 million tons per year of LNG that the plant is expected to produce, to buyers in countries including Japan and the US. Overall construction work for the second-phase is 75% complete. The 800-kilometer (497-mile) twin oil and gas pipelines pass through regions prone to earthquakes, and its vulnerability to landslides was among environmental concerns raised with the European Bank for Reconstruction and Development at a public consultation in Yuzhno-Sakhalinsk, the island's main town, on March 23. Almost 2,000 people were killed in 1995, when a magnitude 7.6 quake struck northern Sakhalin. The EBRD, which was established to promote economic development in former Soviet-bloc countries, is examining the project's environmental and social record to determine whether it should lend Sakhalin Energy about $200 million. It expects to make a decision by September.
Sakhalin Energy said 1,400 kilometers of pipeline have been completed so far, most of it buried underground, out of a total of 1,600 for both the oil and gas lines. Sakhalin Energy officials say the pipeline is safest buried underground, packed by material that allows it to shift in its trench during tremors. Oil pipelines were built above ground in Alaska because permafrost there made it too difficult to bury them. Natural Resources Ministry in 2003 commissioned an environmental study, including a group of 50 experts, which approved the project and efforts to mitigate the effect of landslides. (Bloomberg)