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Russia will sue Shell to halt Sakhalin II works

Russia has said it will sue Royal Dutch Shell Plc to halt the development of oil and gas fields at Sakhalin Island because the $20bn project's pipelines may cause environmental damage.

The Natural Resources Ministry plans to sue the Shell-led group in a bid to overturn authorisations for developing the Piltun-Astokhskoye and Lunskoye fields, the ministry said on Friday in an e-mailed statement. The same ministry on Thursday told Shell it should suspend construction of a pipeline at the project until it can complete environmental and safety studies.

Stopping the project would risk augmenting the costs for Shell and might strengthen state-run Gazprom's efforts to obtain a stake in the venture.

President Vladimir Putin has used the natural gas producer and Rosneft to tighten his control over the nation's energy resources.

"The announcement can be interpreted as piling the pressure on Shell,'' said Chris Weafer, chief strategist at Alfa Bank in Moscow. A spokesman for the Sakhalin Energy project in Moscow said construction hadn't been halted.

The 800km (497-mile) onshore pipelines are crucial for the project, as they'll bring oil and gas from the two offshore fields to Russia's first liquefied natural gas plant and an ice-free oil export terminal that are being built further south.

Costs for the second phase of the venture, the biggest foreign investment in Russia, last year doubled.

The Natural Resources Ministry this year has made a series of complaints about Total SA's Kharyaga oilfield development in the Arctic. The ministry said in June that it would fine Total for failing to eliminate violations.

Total owns 50% in the project, and Norway's Norsk Hydro ASA has 40%. In February, Total learned it would be excluded from state-run oil company Rosneft's Vankor oil fields.

TNK-BP, BP Plc's Russian venture, has also been criticised by officials for violations at the huge Kovykta gas project, in which it will need Gazprom's co-operation to find export routes.

Gazprom has been negotiating with Shell to secure at least a 25% stake in Sakhalin-2 in exchange for Shell getting a 50% stake in the Zapolyarnoye field in Siberia. Sakhalin Energy Investment is 55% owned by Shell, 25% by Mitsui & Co and 20% by Mitsubishi Corp.

The venture hasn't stopped any construction work, Sakhalin Energy said.

"No, absolutely not,'' said Igor Ignatiev, a spokesman for the venture in Moscow. "The company is ready to defend its position. A public announcement is different to action'' in court.

The ministry's push to re-examine the venture's authorisation is being led by Oleg Mitvol, deputy head of RosPrirodNadzor, the ministry's environmental monitoring agency.

"This is not a campaign against the project,'' said Mitvol. "The company knew erosion was a problem, so why didn't they take measures to prevent it?''

The project was approved by a state-backed expert report in 2003, which included some recommendations that the ministry now wants to re-examine, the Sakhalin Energy spokesman said.

© Bloomberg

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