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RUSSIA: Russia stops Shell project; state may be seeking stake

by Lyubov ProninaInternational Herald Tribune
August 4th, 2006

Royal Dutch Shell was told Thursday by the Russian government to suspend construction of a pipeline on Sakhalin Island, threatening to delay a project whose costs doubled last year to $20 billion.

The Natural Resources Ministry said that Shell should halt construction of the link until it can complete environmental and safety studies at the end of the month. The government plans to sue the company to enforce the demand, said Oleg Mitvol, deputy head of the ministry's environmental monitoring agency.

A delay risks raising the cost of the project, the biggest foreign investment in the country, and might strengthen the hand of Gazprom, Russia's state- run energy company, as it seeks to obtain a stake in the venture. President Vladimir Putin has used Gazprom and Rosneft to tighten his control over the country's energy resources.

"Shell is talking to Gazprom about allowing Gazprom into the project and this could easily be, in Russian style, part of the negotiation tactics," said Craig Pennington, global leader of energy research at Schroders in London.

Shares of Shell in London fell 38 pence to 18.61, or $35.14. Gazprom and the ministry denied any link between the demand Thursday and the Russian gas company's bid for a stake in the Sakhalin project.

The venture includes the first liquefied natural gas export plant in Russia at the southern end of Sakhalin Island. The plant needs the pipeline to bring in gas from fields further north, where ice floes make shipping difficult in the winter.

"We are waiting for the end of August," Mitvol said by telephone from Moscow. "We need to get some more documents. After that we'll prepare a lawsuit for the arbitration court in Sakhalin demanding to suspend construction."

Environmental groups seeking to protect whales and salmon have already forced Shell to redesign and reroute onshore and offshore pipelines as part of the second phase of the Shell- led Sakhalin-II project.

Shell has struggled to increase its production and reserves amid cost overruns or delays at several major projects, including the Bonga deepwater oil field in Nigeria, which started in November, two years behind schedule.

Ivan Chernyakhovsky, a spokesman for Sakhalin Energy Investments, the operator of the project for Shell, said earlier by telephone from the site that he could not comment until he had a chance to review the ministry's statement. A Shell spokesman in London made a similar statement.

"By way of measures to lower the risk, we suggest to suspend construction of the pipeline until state environmental expertise of the pipeline project in landslide prone parts is complete," the ministry's statement said. A ministry study began July 25 and will be completed Aug. 25.

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