- The Washington Times - Tuesday, September 26, 2006

MOSCOW (AP) — Russian authorities will try to avoid shutting down a Shell-led liquefied gas project off the eastern island of Sakhalin, the natural resources minister said yesterday. But the minister, Yuri Trutnev, warned that the project was riddled with serious environmental violations.

A final decision on whether to withdraw a key license at the Sakhalin-2 project will be made by the ministry within a month after experts from a state environmental safety watchdog complete an audit, Mr. Trutnev said. The auditors headed to the region yesterday.

“We must do everything possible to resolve this situation without stopping the project,” Mr. Trutnev said at a press conference. But he added: “Rarely have I seen such damaging work for the environment.”

He cited materials provided by environmental groups that purportedly document how the project entails illegal logging and is silting up salmon breeding grounds.

Mr. Trutnev’s ministry said last week that it would revoke the permit at Sakhalin-2, which is being developed by a consortium led by Royal Dutch Shell PLC.

Analysts have suggested the ministry’s move is a bargaining tool aimed at securing more favorable conditions for state gas monopoly Gazprom, which is in negotiations to join the project.

Mr. Trutnev dismissed that suggestion yesterday, saying that other oil companies, including Gazprom and state oil group Rosneft, had been penalized for ecological violations.

Shell infuriated the Kremlin last year when the company said the cost of Sakhalin-2 would double to $20 billion, delaying the date when Russia would see royalties under the terms of the agreement.

Signed in the 1990s, Sakhalin-2 is one of a handful of “production-sharing” agreements that gave Western companies generous tax breaks as well as a controlling role. Today those deals are viewed as an anomaly amid rising state control in Russia’s crucial oil sector.

Mr. Trutnev stressed that the project had been approved under his predecessor and said that were it to come up for consideration today it would be rejected outright. He said he had fired senior officials with the state environmental watchdog on the island in connection with the project.

Plans to revoke the environmental permit would freeze work for 17 months and cost 15,000 jobs, said Igor Ignatyev, Sakhalin Energy’s vice president for corporate affairs. Mr. Ignatyev said the documents and photographs provided by environmental groups gave an exaggerated perspective of the project.

“If it is signed, it will have irreversible effects,” Mr. Ignatyev said on Ekho Moskvy radio. “I have the sense that the people who take these steps don’t know what the legal consequences of this might be.”

Mr. Trutnev responded: “We understand perfectly the investment importance of this project and its significance for the economy. We are proceeding on the basis that we must do everything … to avoid shutting down the project.”

“At the same time … the company must do everything to liquidate the damage done to the environment, and if this is not done we will not be able to allow work at the project to continue.”

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