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Russia will not agree to the Sakhalin II energy project operator's doubling of its cost estimate to $22 billion
Russia will not agree to the Sakhalin II energy project operator's doubling of its cost estimate to $22 billion, the energy minister said Tuesday. Under the production sharing agreement behind the massive oil and gas project in Russia's Far East, Russia will only receive profits after the operator, Shell-controlled Sakhalin Energy, has recouped all costs. Sakhalin Energy's move to double its cost estimate puts off the date by which the government will receive revenue from the project. "We cannot agree to this," Viktor Khristenko said. The minister said he hoped a decision on the cost estimate would be adopted in the first quarter of 2007. "If we manage this earlier, that will be laudable," Khristenko said, adding that he had met with the head of Shell Friday to discuss the issue. "We are looking for a solution that would keep the project going and bring no risks in its implementation on the one hand, while maintaining Russia's interest on the other," Khristenko said. The project operator has been under scrutiny since September, when the Natural Resources Ministry canceled its 2003 approval of Sakhalin II. Sakhalin Energy is accused of causing serious damage to Sakhalin Island's ecology, including deforestation, toxic waste dumping and soil erosion. Russia's environmental watchdog said Tuesday that court proceedings on compensation for environmental damage would most likely begin in March 2007. Following months of intense pressure on Shell from Russian authorities, the country's state-run energy giant Gazprom [RTS: GAZP] looks set to gain a large stake in Sakhalin II, after brokering a deal with Royal Dutch Shell. A Gazprom spokesman said Monday that Gazprom CEO Alexei Miller had a working meeting with Shell CEO Jeroen van der Veer Friday, at which the Shell chief put forward proposals on Gazprom's participation in the project. The spokesman declined to give details, but said the company was studying the offer. Shell's doubling of its cost estimate infuriated Russian authorities and scuppered a previous agreement on an asset swap, which would have given Gazprom a 25% stake in Sakhalin II. Some analysts now expect the Russian energy giant to gain a controlling stake in the project. Shell holds 55% in Sakhalin Energy, Japan's Mitsui controls 25%, and Mitsubishi 20%. Much of the liquefied natural gas from the project is set to be exported to Japan, which is seeking to diversify its energy imports. Japan's minister of economy, trade and industry said Tuesday his country wanted guarantees that it would receive oil and gas from the Sakhalin II project on schedule in view of Gazprom's possible involvement. Sakhalin II comprises an oil field with associated gas, a natural gas field with associated condensate production, a pipeline, a liquefied natural gas plant, and an LNG export terminal.
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