Saturday, September 23, 2006

Russia Causes Stir with Sakhalin-2 Developments

Sources: News Analysis: Russian oil reversal stirs outcry - IHT; Sakhalin-2 gets time to breathe - IHT

Russian authorities this week angered Japanese and British officials—and raised eyebrows everywhere—when it announced that the Russian government would revoke an environmental permit for Sakhalin-2, a joint, $20 billion oil and gas exploration and production project operated by Royal Dutch Shell and Japan’s two biggest trading companies (Mitsui and Mitsubishi).

Russian officials justifieed the revocation on sixty alleged environmental violations. The EU Energy Commissioner, Adris Piebalgs, countered that Russian officials should identify the violations, provide concrete criteria for compliance, and give the project operators reasonable time to comply, rather than suspend the project altogether.

Critics see this as another power play by a Russian government that is increasingly willing to flex its energy muscles in spite of international criticism. Although, Russia assures that it will not cancel the existing contracts, many suspect the move is a pretext to force comprehensive renegotiations of the production contracts and force the operators to give state-owned Gazprom a stake in the project. In fact, the Russian government has made no secret about its displeasure with the terms of the contract and Russia’s right to encourage foreign investment without becoming a banana republic.

Ultimately, a lot of money is at stake in Sakhalin-2; even under current terms, the project is expected to generate $85 billion for the Russian government in taxes and royalties by 2050.


1. Should developing nations have greater flexibility to renegotiate contracts that violate environmental standards, particularly when the contracts were negotiated at a time of a nation’s economic and political weakness?

2. What diplomatic repercussions, if any, will Russia face as a result of its brazen energy policies?

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