Sakhalin Gas Project In Doubt

Russia's government has cancelled environmental permits – effectively halting work to develop the second stage of the Sakhalin gas project in Russia’s far east. The Natural Resources Ministry withdrew its ecological approval for the multi-b

Analysts agree, and say the agreements do not account for cost overruns. Oil and gas analyst Adam Landes,  of  Renaissance Capital in London, said the energy companies were unfairly protected by the current PSAs and that Russia was pushing for a new relationship.

“Russia does want these cost overruns, which are due in Russia’s eyes due to underperformance… to be faced. In the real world, if you have cost overruns, your returns are lower. Under the PSA framework, because you are offered cost recovery before the states get their taxes, you essentially assume no risk and I think anyone who is standing back a little can see how Russia may be offended by that.”

The move, however, brought quick international reaction. In Brussels, the European Commission said it was taking very seriously Russia’s decision. Japan's Cabinet Secretary Shinzo Abe said it could hurt diplomatic relations.

Japan's two biggest trading companies, Mitsui and Mitsubishi, have a combined 45 percent stake in Sakhalin-2.

Another 55 percent is owned by project operator Shell. Its discussions to swap assets with Russia's gas monopoly Gazprom are progressing slowly. Gazprom on Tuesday suspended talks with Shell because of uncertainties over Sakhalin-2.

The project already produces more than 70,000 barrels of oil per day as part of phase-1, but phase-2 will double that output. Phase-2 also involves the construction of the world's biggest liquefied natural gas (LNG) plant with capacity of 9.6 million tonnes a year. The start had been scheduled for summer 2008.