Russia holds out olive branch to Shell

Russia attempted to defuse the growing diplomatic crisis over its threats to strip Shell of its licence to operate the US$20bn Sakhalin-2 oil and gas project yesterday, insisting it was a "long way" from breaking the deal it struck in the early 1990s.

Sergei Lavrov, the foreign minister, offered the oil major an olive branch in an attempt to calm down a row that has embroiled most Western governments and raised serious concerns over the Kremlin's plans for its vast natural resources.

Over the weekend, the US government added its voice to the international condemnation of Moscow's decision last week to withdraw ecological permits for Shell's Sakhalin-2 venture, saying it was "very concerned" by Russia's actions.

The British, Dutch and Japanese governments have all publicly criticised Russia's move.

Speaking in New York, Mr Lavrov said: "We are a long way from backing out of agreements we have reached, no matter how difficult the conditions were when they were agreed to."

He was referring to the fact that Shell struck the original deal with the Russian government in 1993, when the then president, Boris Yeltsin, was desperate for foreign investment to help a country on its knees.

With the oil price at record highs, the outlook for Russia is vastly different today, however.

Sakhalin-2, based on a former Tsarist penal colony in the country's far east, is the biggest Western investment in Russia to date.

Shell, which is the lead company in the project with a 55 per cent shareholding, has fallen out with the Russian government in the past 12 months due to vast cost overruns that have doubled the total investment needed to US$20bn.

This is because, under the original "production-sharing agreement", Moscow only starts getting a share of the profits - estimated to be worth US$50bn to Russia over the project's lifetime - after the investors, who include Japan's Mitsubishi and Mitsui, have recouped their costs.

Many analysts believe Russia's threat to withdraw the Sakhalin-2 licence, which would scupper the project, is intended to get Shell to renegotiate the terms of the original deal in favour of Moscow.

Shell is under pressure to cede a bigger share to Gazprom - which is 50 per cent-owned by the state - than the 25 per cent originally on the table.

Talks between Shell and Moscow over a long-standing agreement to swap the 25 per cent stake for a half share in one of Gazprom's gas fields were put on ice last week.

Mr Lavrov insisted that last week's threats were not politically motivated.

He reiterated that the project had violated environmental regulations.

But Western observers are not convinced - particularly given that a separate Anglo-Russian joint venture, TKN-BP, to develop a vast Siberian gas field, looks set to run into similar problems.

Sakhalin-2 is 80 per cent complete.

It is scheduled to start delivering liquefied natural gas to countries including Japan and Korea in 2008.

A spokesman for the US State Department called on Russia to uphold promises it made at the G8 summit in St Petersburg in July.

- INDEPENDENT