This is the first editorial in this week's issue of the Sakhalin Times

The decision of the Russian Ministry of Natural Resources to revoke a special environmental license for the second phase of the Sakhalin II project could not have come at a worse time. With the who’s who of the oil and gas industry set to visit Sakhalin for the oil and gas conference next week, such a decision by the federal authorities shows Russia in a very poor light to the international business community.

The revoking of the license completely puts the second phase of the Sakhalin II project on hold and it may take more than 6 months for a new license allowing Sakhalin Energy to restart work on the phase. Such a scenario has several negative effects for Russia and the Sakhalin Region in general. First of all, delivery of LNG to buyers who have already signed major contracts is very much likely to get delayed. The Sakhalin II project has always been looked upon by countries in the Asia-Pacific Region as a stable source of energy supply in contrast to the volatile Middle East. Delays and uncertainties are going to force buyers to reconsider Russia as a secure energy supplier.

Looking at a wider political context, Russia’s diplomatic relations with Japan and the European Union are also likely to be seriously affected. In the case of the former, the much-touted future prime minister made a statement to this effect. It is very much against Russia’s interests to isolate its major trading partners.

Despite insistence that the interference with the project is based on environmental concerns, it’s hard to imagine that this is not an attempt by federal authorities to exert greater control over the Sakhalin II project. Several elements in the federal Government are dissatisfied with the terms and conditions of the three Production Sharing Agreements (PSAs) signed in the 1990s.
All three PSAs are looked upon by the present regime as outdated investment mechanisms. While the country is under no obligation to sign new ones, honouring the existing PSAs is tantamount to Russia being a respected member of the global community.

It may take direct intervention from the Kremlin to fix this present mess but it is in everyone’s best interests that work on the Sakhalin II project’s second phase goes on as per schedule.

This is the editorial in this week's issue of the Sakhalin Times

Over the last few years, the Sakhalin Energy consortium, which operates the Sakhalin II project, has been under fire for alleged violations of Russian environmental laws. Most of these attacks have come from environmental groups. Since the early part of the summer, the attacks have originated from an unlikely source: elements within the Russian Government. The latest developments in the saga between elements in the Russian Federal Government and Sakhalin Energy couldn’t come at a worse time. In just over two weeks, the global energy spotlight will be on the Sakhalin Region with the upcoming Sakhalin Oil and Gas Conference. The recent developments must be a great source of embarrassment for the hosts of the conference, the Sakhalin Administration.

There have been several threats made to Sakhalin Energy through the media and several statements by various government agencies that range from forcing the company to stop oil production to even cancelling the production sharing agreement. The threats that first originated from the Russian Academy of Science and then the Ministry of Natural Resources and the now well-known Oleg Mitvol, were time and again refuted by the Ministry of Industry and Energy. The latest rounds of threat have led to a senior Kremlin aide personally vouching for the Sakhalin II project.

The Sakhalin Energy consortium is the only Sakhalin shelf project operator that doesn’t have a Russian member and this is enough for several government agencies to launch constant attacks on the consortium. Whether these attacks have anything to with Shell’s proposed asset swap with Gazprom or not, the fact is that forced stoppages of the project will be detrimental to everyone’s interests, particularly the Russian Government’s. One of the biggest complaints against the Sakhalin II project is the project’s delays. If Sakhalin Energy is stopped from constructing its pipelines and from its other activities, this will just lead to even more delays and quite obviously an increase in costs.

If it is really the environment that these elements in the government are concerned about, then they also need to focus on Russian oil and gas companies and do a serious study and evaluate the effects of the activities of these companies on the environment. The findings may or may not be to the liking of the government but such a study would at least be convincing of the seriousness of these elements to protect the environment.

Undue government interference with the Sakhalin II project could seriously affect Russia’s reputation as a stable and reliable investment destination for multinational oil and gas companies. This would also have a definite spill over into investment in other sectors of the Russian economy.