When Shell received the right to develop Sakhalin fields under a product-sharing agreement 12 years ago, the West welcomed the deal.

That was the time of a weak Russian state and dictate of emerging oligarchs. State property was sold at knock-down prices in a hasty privatization prescribed by Western experts. Yukos, for example, paid only about $150 million for Yuganskneftegaz, its core production unit.

The PSA on Sakhalin-II was the first agreement of this kind signed by Russia, the biggest foreign-financed project in this country and the world's biggest oil and gas project. Investors were right: the game was worth the candle. The aggregate recoverable reserves of the Piltun-Astokhskoye and Lunskoye fields developed within the project total 150 million tons of oil and 500 billion cu m of gas.

To produce liquefied natural gas, a first Russian LNG plant with an annual capacity of 9.6 million tons is being built in Prigorodnoye, southern Sakhalin. The second stage of the project envisages the construction of two new offshore platforms, an 800-km pipeline running across the island from the north to the south, and an oil shipment terminal.

This is the background of the story. But the Russian economy has made a complete turnaround since then. It is not only that the country now has huge gold and foreign currency reserves and the Stabilization Fund accumulating oil windfalls, but the government's attitude toward Russia's natural resources has also changed.

A PSA always dictates special terms of investors' participation, which are not always beneficial for the country. The Russian Industry and Energy Minister, Viktor Khristenko, says that if he had been involved in talks with Shell, he would never have agreed to those terms. The specific terms of the PSA were not in Russia's interests even then, and are even less acceptable now. There were many opponents to the agreement in the oil industry, in parliament and in the government.

Back in 2003, Mikhail Kasyanov, the prime minister at the time, proposed that field licenses should first be put up for tender or auction on national terms. A PSA could be signed only if there were no buyers for a licence but the field needed to be developed.

Complaints about Shell's operations on Sakhalin were numerous even before the trouble started. The project's implementation has been accompanied by many violations in Russian environmental, labor and immigration legislation, although the PSA does not exempt its participants from responsibility under Russian laws, Khristenko says. A PSA "should not be a global pardon," he insists.

The Russian authorities did not like the constant increase in the project's costs either. The Sakhalin-II operator now insists on more than doubling its budget, from the endorsed $10 billion to $22 billion. This postpones the time when the government will start seeing profits by two or three years. The delay will cost Russia several billion dollars, the government estimates. Commenting on the situation in October, Russian President Vladimir Putin said, "Look at the additional costs: legal expenses have almost doubled, and spending on foreign personnel and business trips have more than doubled."

The Western media are now discussing possible "political motives" behind the Sakhalin-II scandal. Their arguments boil down to the same conclusion: the Kremlin is "evil" and Western business is "honest." As Khristenko puts it, no matter what happens in Russia, there is always the same interpretation in the West: the investment climate has changed drastically. This position is nothing but an attempt to put political pressure on Russia using some mythical allegations, he says.

Yet no one in the West - except the environmentalists - has noticed that a recent environmental inspection estimated the damage to Sakhalin flora and fauna from Sakhalin Energy's operations at $10 billion. The final amount will be announced by fall 2007. Even Sakhalin Energy representatives have admitted that it will be necessary to restore 529 rivers on the island, to say nothing of the Aniva bay, of pipes laid in wrong places, of extinct fish, of endangered gray whales, etc. I wonder how the British press would react if foreigners swamped even one of their rivers that was a salmon breeding habitat.

The case of Sakhalin Energy (55% owned by Shell) will be heard in court at the beginning of the next year. Lawsuits will be filed simultaneously in several jurisdictions. The case will be tried under Russian, Belgian, English and, possibly, Japanese law. The agreement with Shell stipulates that Stockholm Arbitration Court may also be involved, Khristenko says.

Russia is determined to make a decision on the Sakhalin-II budget in the first quarter of 2007. The authorities do not deny that state-controlled gas monopoly Gazprom is interested in joining the project. It is now in talks on terms of its participation. However, the official decision is yet to be made. It is very important to understand that no matter whether Gazprom joins Sakhalin-II or not, government requirements, including environmental standards, will not change and the violations will have to be rectified.

The opinions expressed in this article are those of the author and may not necessarily represent those of RIA Novosti.

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