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Sakhalin-2 project broke lot of rules, says Russia

Royal Dutch Shell's $22 billion Sakhalin-2 oil and gas project has broken a significant number of environmental regulations "in barbaric fashion" and the company and its partners will have to pay a fine, Russian Natural Resources Minister Yuri Trutnev said on Tuesday.

Trutnev said the process of working out the size of the fine should be ready by the middle of 2007, adding that Moscow has no intention of revisiting the original production-sharing agreement that Shell and its partners signed with Russia.

An increasingly confident Russia, boosted by high energy prices, is putting pressure on the project over cost overruns and what it says are environmental violations, as well as to secure a stake for state firm Gazprom.

Trutnev ordered an environmental probe into Sakhalin-2 -- one of the world's biggest energy projects -- on the grounds that it was damaging the local surroundings. Russia revoked environmental approval for Sakhalin-2 in September.

"The comprehensive assessment has been finished and its conclusions do not differ from our earlier comments on the situation ... it says that in the process of building Sakhalin-2, a significant number of Russian laws protecting the environment were broken," he told reporters in Ottawa.

"I do hope in some instances that the company will be able to mitigate the consequences ... but in others this obviously won't be possible and then they'll simply have to pay money."

Russia says Shell damaged Sakhalin, a large island off the eastern coast that is a feeding ground for gray whales, and that contractors have illegally cleared forests, dumped soil in rivers and laid pipelines in areas prone to mudslides.

Trutnev said it would take at least six months to figure out how much damage Shell and its partners -- Japan's Mitsui & Co. and Mitsubishi Corp. -- had caused.

"Then after that the company has to pay," he said, giving no details as to how much the fine might be.

Russia is particularly annoyed that the consortium has doubled its cost estimate for the project because under terms of a production sharing agreement with the companies Russia will not see any profit until the costs are recouped.

Russian state auditor Sergei Abramov said last week he expected the Sakhalin-2 partners to accept a change in the terms of the agreement to improve Russia's share.

"The government has not looked at the question of whether it is satisfied or not with the Sakhalin-2 production sharing agreement and it will not do so," Trutnev said, adding that the most important factor in such deals was that all those involved follow Russian laws.

"Unfortunately, environmental protection laws in Russia are less tough than in the majority of developed countries ... and in this case they are being violated in barbaric fashion."

Trutnev dismissed media suggestions that Moscow was using environmental rules as a smokescreen for levering concessions from foreign firms working in Russia, saying he was being just as tough on Russian firms.

He also said his ministry had submitted proposals to the government that would impose restrictions on foreign investment in Russian natural resources.

Firms wishing to invest in large strategic resources -- for example, oil deposits which totaled more than 70 million tonnes -- would have to form joint ventures with Russian forms, he said. If the law were passed, it would not affect deals that had already been signed.

© Reuters

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