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Sakhalin 2 Problems Postpone Liquid Gas Supplies to the USA, Japan and Korea
September 27, 2006 13:32

Sakhalin 2 is a project in the framework of which Piltun-Astokhskoye and Lunskoye oil and gas fields are being developed. The cost of geological reserves may be estimated at 150 million tons of oil and 500 billion cubic meter of gas. Sakhalin 2 production sharing agreement was signed on June 22, 1994. Russian government and the administration of the Sakhalin region spoke in the name of the country. The Sakhalin Energy Company, (the shareowners are Royal Dutch/Shell (55%), Japanese Mitsui (25%) and Mitsubishi (20%), is the operator of the project. As directed by requirements the first Russian natural-gas liquefaction plant with capacity of 9.6 million tons a year will be built. Japan, Korea and the USA are to be supplied with liquid gas from the plant, the first deliveries are planned to start in 2008.

Sakhalin 2 has become the first project in Russia brought into play on the basis of Production Sharing Agreement (PSA).

On Monday, September 18, the Ministry of Natural Resources annulled its own order of 2003 about favorable expert evidence covering Piltun-Astokhskoye and Lunskoye fields’ complex development. The examination was conducted in contravention of range of laws and on the basis of ill-made and incomplete documentation. Appealingly, the operator of the project Sakhalin 2 will have to obtain a new license for oil field development on Sakhalin shelf. The operator warns, that the repeal of Ministry of Natural Resources order may have negative consequences for Russia. It may tie-up the project.

The apprehension that the supply start may be postponed has already led to the fall of share quotation belonging to Japanese Mitsui (25%) and Mitsubishi (20%). The corporations abstain from any judgments referring to the absence of information. They have already invested $4.7 billion into Sakhalin 2 project, and are marking time.

However the secretary general of Japanese government Sindzo Abe spoke in support of the corporations. Such a big delay with the project, the symbol of Russian and Japanese cooperation will inevitably affect all the complex of terms between two countries.The reasons given to the Japanese ambassador in Russia by the Head of the Ministry of Natural Resources couldn’t soften the position of Japan. According to the Russian minister, the material project parties haven’t exercised about a half of ecological recommendations. We can’t protect the environment halfway, said the minister.

It is interesting, that shortly before the ministry decision Sakhalin Energy Company suspended land pipelining on slide sites on Sakhalin Island without date. But this demonstrative step wasn’t enough to stroke civil servants down about Sakhalin 2 ecological safety.

The ministry warns that the ecological inspections of the project will be prolonged. Water flows and offshore zones haven’t been checked yet. Scientists feel necessary to suspend the pipelining and to carry out some examinations. Formerly the Federal Service of Supervision of Natural Resource Usage announced the offshore pipeline might any moment be destroyed with mud streams. Apart from pipelines collapse and oil spill, mud streams may result in pollution of water flows with fuels and lubricants, equipment breakdown and loss of life. Ecologists caution that the rare gray whale composite may be depopulated in the Sea of Okhotsk. Whales suffer from high noise pollution level. Besides, there is information of illegal deforestation.

Anyway, our civil servants don’t suppress main reason of recalling the favorable ecological expert evidence is insufficient progress of the PSA. This summer the Ministry of natural resources begrudged the non-fulfillment of the construction timetable of oil and gas fields project elements, which implies changes in production schedule. It affects negatively Russian national interests as delays the moment of production sharing between the state and the investor; therefore it determines the appreciation of the project.

Here we must remember the basic princip of SPA: the sate is to get its profit share only after the investors refund their inputs. In this case losses of budget are the pay-off for intensive, long-term and risky investments. SPA protects the investor from sudden changes in the national legislation within the taxation field, as it substitutes current tax and license treatment with treaty provisions, which should remain valid during all the time of the project execution.

However all these facts are not a solution for the main problem of unpredictability of operating conditions for foreign companies in Russia. The rules must change in series, and a sudden recall of the license is misdealing. Nevertheless, the question is not about the recall of the license. According to the experts, the authorities and the operator of Sakhalin 2 project will come to agreement. It is not improbable that the state will meet habitat, for instance, in revising of the developing budget.

Besides, Gazprom may become one of the parties of Sakhalin 2. Shell and Gazprom arranged the asset exchange of Sakhalin 2 and Zapolyarnoye–Neokomskiye reservoir. Gazprom will get 25% plus 1 share in Sakhalin 2, and Shell – 50% in Zapolyarnoye–Neokomskiye reservoir. Gazprom joining the Sakhalin 2 may shorten the project implementation period.

On September 20 it was reported that Gazprom suspended the negotiations with the English-Dutch company over asset exchange in the framework of Sakhalin 2 project. Gazprom would like to wait until Shell and ecologists solve the problem. Experts have no doubt: as soon as the foreign company arranges all the details with the civil servants, the talks will be prolonged.


Olga Pletneva


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