Global Insight Perspective | |
Significance | Russian Natural Resources Minister Yury Trutnyev, on a visit to Sakhalin Island to inspect the troubled Sakhalin-2 project personally, confirmed environmental damage and warned the Shell-led consortium developing the project that it could face charges for violations of Russia's Criminal Code. |
Implications | Trutnyev asked Rosprirodnadzor, the environmental watchdog agency of the Natural Resources Ministry, to continue inspections of the project for another month and then report back on the full cost of environmental damage done by the consortium. |
Outlook | The extension of the investigation will allow the consortium to continue operating normally, but the final report of the probe could see the project halted altogether—at least temporarily—if a water-use licence is revoked, although a hefty fine is more likely in order. |
Not So "Softly, Softly"
After weeks of threats culminating in the September cancellation of a key environmental permit for the Sakhalin-2 project, Russian authorities have arguably taken a more diplomatic approach in October to the Shell-led consortium that is developing the troubled project. Few would agree that Russian officials have treated Shell and its Japanese partners, Mitsui and Mitsubishi, with kid gloves, but the truth is that senior Russian government officials have sought to take some of the sting out of the permit cancellation (or rather, the sharp criticism of the government) in recent weeks by trying to clarify the state's intentions. Rather than clamping down on IOCs operating in Russia, government officials have attempted to frame the Sakhalin-2 controversy, in particular, as a crusade to force compliance with Russia's environmental regulations (see"Related Articles"below).
Many Russia watchers are of the mindset that the environmental campaign is merely a cover for the government's true objective of asserting greater control over the development of the country's oil and gas reserves, with a particular focus on projects geared to supply Asian markets. Yet, Russian authorities are increasingly turning the "soft" issue of environmental protection into a hardball tactic to pursue the state's goals in exerting greater influence over oil and gas projects on Sakhalin Island. Yesterday, Natural Resources Minister Yury Trutnyev essentially ditched the recent "softly softly" approach in a personal visit to inspect the Sakhalin-2 project.
Trutnyev, after conducting an aerial inspection of environmental damage at the project, refused to massage the message for Sakhalin Energy, the consortium developing the Sakhalin-2 project. The minister said that, "Violations at Sakhalin-2 concern at least five articles of the Criminal Code," adding that he had asked Rosprirodnadzor to submit details on the violations to the Prosecutor General's Office within two weeks for possible legal action. Furthermore, Trutnyev asked Rosprirodnadzor to extend the full environmental probe of Sakhalin-2 for another month and then report back with a comprehensive figure for the costs of the environmental damage by Sakhalin Energy within four months.
More Regulatory Heat
Although the delay in the completion of the investigation will allow Sakhalin Energy to continue to operate the project normally—Trutnyev noted that "I didn't come here to tell them to stop work immediately"—the prospect of severe fines and/or criminal prosecution in the future is little comfort for the Shell-led consortium. Trutnyev added that work on some sections of the project's pipeline route could face temporary stoppages, which would add to costs and potentially delay the mid-2008 timetable for Sakhalin-2 to begin exports.
Furthermore, Dmitry Belanovich, the regional head of Rosprirodnadzor in Sakhalin, said that the inspection commission for Sakhalin-2 was preparing evidence to have the project's water-use licence revoked. Oleg Mitvol, the bulldog deputy head of Rosprirodnadzor, told Ekho Moskvy radio yesterday that the revocation of the water-use licence would make construction work on the project impossible, pointing out that, "working without the licence is criminally punishable".
With Russian government authorities reiterating the environmental damage done by Sakhalin Energy, Ian Craig, the head of the consortium, claimed that he was hearing about some of the violations for the first time. However, the consortium, which has acknowledged "environmental challenges" at Sakhalin-2 and has promised to rectify problems as quickly as possible, once again sought to de-fang Russian regulators by promising to address identified problem areas. Craig, in a tense meeting with Trutnyev, said that issues would be "fully and transparently addressed, and where appropriate, action will be taken."
Outlook and Implications
Russia's use of the "environment weapon" to beat Shell and the other IOCs over the head has been criticised as masking the government's true intentions, and the more authorities attempt to insist that the environmental protection campaign is legitimate, the more blunt the weapon becomes. Out of virtually nowhere, environmental protection is suddenly of utmost importance to Russian officials, with even President Vladimir Putin taking on a green veneer in a call-in question-and-answer session yesterday. "Environmental agencies in collaboration with ecological non-governmental organisations will thoroughly monitor compliance with current legislation," Putin said in response to a question about Russia's commitment to protect Sakhalin Island's environment.
While Russia's newfound commitment to enforce environmental regulations is admirable, there are few who believe that the pressure being applied to Sakhalin Energy is purely the result of its environmental failings. Huge cost overruns at the project threaten to delay Russia's receipt of revenues from Sakhalin-2 until the consortium's costs are recouped, and Russian anger over the revised budget for the project is playing out in the crackdown on Sakhalin Energy's non-compliance with environmental regulations. Gazprom's planned asset swap deal with Shell has also been delayed as a result of the Sakhalin-2 project's cost revisions, exacerbating the Kremlin (Russia's presidential administration)'s frustration in not having a direct say in a key export project oriented to Asia.
Thus, alleged infractions by the Shell-led consortium including silting salmon-bearing rivers and illegal logging in nature reserves are taking on added importance, with corresponding threats to the consortium's licence. Russia is clearly seeking new terms of the Sakhalin-2 production-sharing agreement (PSA), even if the state insists it has no plans to revise the PSA. Rather, Russian authorities appear to hope that applying enough administrative pressure on Shell and its partners will force the consortium to voluntarily consent to revise at least the cost recovery component of the PSA. Gazprom could then complete its asset swap with Shell and secure a stake in Sakhalin-2, giving Russia a direct role in the project.
Once the thorny problems of the cost overrun and Gazprom's stake in Sakhalin-2 are resolved, the government's environmental issues with the project should melt away. Considering the potential delays to the timetable for the project from a full suspension of work at Sakhalin-2, the government seems more likely to assess a hefty fine on the consortium rather than insist on a full halt to construction. Still, Trutnyev expressed the government's frustration in its perception of the consortium's attitude towards the environmental violations, telling a news conference after the meeting with Craig that, "I understand the company is trying to save face, but that can be done in other ways—you should acknowledge if you've done a bad job."
Related Articles
Russia: 25 October 2006: Natural Resources Ministry Seeks Deadlines for Licence Compliance by Oil Companies
Russia: 18 October 2006: Pressure on Sakhalin-2 Eases, but Tough Negotiations on Cost Overruns Remain
Russia: 17 October 2006: Is LUKoil Licence Crackdown Merely a Ploy in Russia's Grand Strategy?
Russia: 16 October 2006: Shell Cites Progress in Addressing Russian Ecological Concerns at Sakhalin-2
Russia: 29 September 2006: Sakhalin Energy Reportedly May Negotiate With Russian Government on Earlier Cost Recovery
Russia: 28 September 2006: Sakhalin-2 Rhetoric Eases; Russian President Warns Against "Unconscientious" Energy Investors
Russia: 27 September 2006: Temporary Reprieve for Shell at Sakhalin-2; TNK-BP, Total Face Environmental Probes
Russia: 26 September 2006: Full Environment Probe Ordered for Shell's Sakhalin-2 Project
Russia: 22 September 2006: Is There a Path Out of Russia's Sakhalin Mess?
Russia: 19 September 2006: Shell-Led Russian Project In Jeopardy Following Cancellation of Environmental Permit