Russia moves to suspend Sakhalin-2 development project

Oct. 2, 2006
Russia’s Ministry of Natural Resources (MNR), citing inadequate environmental safeguards, effectively decided Sept. 18 to suspend the Sakhalin-2 oil and gas development project.

Russia’s Ministry of Natural Resources (MNR), citing inadequate environmental safeguards, effectively decided Sept. 18 to suspend the Sakhalin-2 oil and gas development project.

The suspension affects Phase 2 of the project and appears to have been undertaken in a way to prevent any court action by the firms affected.

As a result of the move, construction work will be suspended until new environmental measures are drawn up, submitted to government authorities, and approved, said a ministry spokesman, who added that the suspension applies not only to pipelines but also production and shipment facilities.

Under Phase 2 of the project, operator Sakhalin Energy aimed to build two offshore platforms, a gas liquefying plant with throughput of 9.6 million tonnes/year, a gas condensate refinery, two lines of an 800 km pipeline, and an oil offloading terminal.

Sakhalin Energy denied the Russian government allegations about environmental problems on the development.

“Specific issues referred to by Rosprirodnadzor (the Russian environmental watchdog) and MNR are immaterial. All concerns are being addressed expeditiously in cooperation with the relevant authorities and do not constitute any legal grounds for annulment,” it said.

“We are confident there are no valid grounds to revoke order 600, which approved the SEER’s (state ecological expert review) conclusion for Sakhalin-2, Phase 2 in 2003, and thus, to invalidate the SEER’s conclusion, which has been successfully defended in the Russian court as recently as Aug. 29, 2006,” the statement said.

The move by the Russian government, however, appears to prevent any court action on the decision. MNR decided to rescind governmental approval for an environmental survey of the project, while the Russian Federal Service for the Supervision of Natural Resources also withdrew its lawsuit filed in Moscow calling for the Russian government to revoke its approval of the project.

As a result, a court will cancel a hearing on the case that was scheduled for Sept. 21, suggesting that Russian authorities have chosen to end the exploration project without resorting to court procedures.

Russian authorities are thought to be putting pressure on the Sakhalin consortium in order to improve the chances of a Russian firm joining the project.

Sakhalin-2 is the only major oil and gas project in the country in which a Russian company doesn’t have a stake, although Royal Dutch Shell PLC is in talks with OAO Gazprom on trading up to 25% of Sakhalin Energy for a stake in another Russian gas field.

As part of Russian pressure, MNR Minister Yuri Trutnev said his country could lose billions in the Sakhalin-2 oil and gas project if operators continue to raise expenditures (OGJ Online, Sept. 14, 2006).

But the project operator denied that claim in a recent statement. “Sakhalin-2 is the world’s largest integrated oil and gas project, and with $20 billion of inward investment, it is the biggest direct foreign investment in Russia,” the statement said.

“The economic benefits to the Russian Federation from these projects will total over $50 billion, assuming oil prices in the region of $34/bbl,” it said.

It added that the decision could lead to delays in the project, which is scheduled to start shipping LNG to Japan as early as 2008. Investors in the project include Japanese firms Mitsui & Co. and Mitsubishi Corp.

Both firms declined comment but Japanese Chief Cabinet Secretary Shinzo Abe said the Russian decision could have an adverse effect on overall Japan-Russian relations, if the project faces what he called an “extended delay.” He did not specify the length of time that might be.

Observers said the development could force the Japanese government to review its energy policy since Japan may no longer be able to rely on a project designed to diversify its sources of energy and reduce its dependence on supplies from the Middle East.