Sakhalin scheming

For months, the Russian authorities have accused the Shell-led consortium responsible for developing the giant Sakhalin-2 LNG project of violating environmental laws. The complaints struck a chord at home and abroad, since the prospect of a multinational corporation ruining the habitat in a remote part of the world that is the feeding ground for the world’s only population of grey whales easily excites indignation.

Yet the Kremlin’s concern for ecology is something of a pretext. The real issue is the production-sharing agreement (PSA) under which Shell is developing Sakhalin-2. This stipulates that Russia will not benefit until the foreign consortium recoups all of its costs and receives a 17.5% real rate of return on its investment. A revision of costs from the initially planned 10 billion dollars to 22 billion means that Russia will not start receiving its share of revenue until 2010 at the earliest.

Officials including President Vladimir Putin have indicated that this is not acceptable. They regard the PSA, signed under Boris Yeltsin in 1994, as exploitative and have warned that they will not accept a doubling of costs unless it is renegotiated.

For Moscow the stakes are high. Russia wants to be regarded as a reliable international business partner but is determined not to be seen as a resource colony of the West. It was thus no surprise when the Audit Chamber last week quietly suggested, without any reference to environmental issues, that Shell might like to offer to revise the terms of Sakhalin-2.