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Japan, UK continue Sakhalin-2 discussions after EBRD pulls out

The $22bn Sakhalin-2 oil and gas venture, the largest foreign investment in Russia, may still receive funds from Japan and the UK after the European Bank for Reconstruction & Development pulled out.

Russia's state-owned Gazprom took control of the project from Royal Dutch Shell Plc. last month. Its entry prompted the EBRD to cancel plans to provide a loan of about $300mn, the bank's President Jean Lemierre told reporters in London on Thursday.

"We have not decided to withdraw funding; it is currently under assessment," said Ryutaro Nishizaki, spokesman for Japan Bank for International Co-operation, by phone from Tokyo yesterday, declining to give any details on the bank's proposed funding.

The EBRD's withdrawal may prompt cancellation of a further $7bn in loans from other state-owned credit agencies and commercial banks, which had expected it to take the lead.

Last year, the EBRD said environmental clearance for the project by the bank would influence larger loans from other government and private-sector banks in Japan, the US and Europe. "We are still assessing the project," Steve Roberts-Mee, a spokesman for the UK's Export Credit Guarantee Department, said by phone from London yesterday. "Changes in circumstances will have to be taken into account in terms of our assessment of the risk of the project."

Gazprom, Russia's gas export monopoly, agreed to buy a 50% stake in the venture on Sakhalin Island, in eastern Russia, from foreign partners Shell, Mitsui & Co and Mitsubishi Corp. JBIC was planning a $3.5bn direct loan for Sakhalin-2, Project Finance International magazine said in February 2005.

Gazprom's acquisition of shares, scheduled for completion by the end of February, will leave The Hague-based Shell with 27.5%, Mitsui with 12.5% and Mitsubishi 10%.

The EBRD, set up by Western governments in 1991 to help build market economies in Eastern Europe and former Soviet states, was under pressure from environmentalists who said the Sakhalin-2 project's impact on salmon and whales and other social, environmental and safety matters made it unworthy of funding. It had been monitoring the project since 2002 as part of its due diligence process, including holding public consultations on Sakhalin Island last year.

The UK's ECGD doesn't expect to make a final decision soon on whether it will provide financing, which comes in the form of guaranteeing payments to UK companies that export equipment or services to the Russian project. It hasn't said how much funding it may provide.

© Bloomberg

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