Russia Cancels Shell-Sakhalin Development Contract

Russia cancelled an essential permit for a Shell-led consortium to develop the huge Sakhalin-2 oil and gas fields, as a top official warned foreign energy companies may lose their licenses.

The environmental permit withdrawn from British-Dutch Shell is the latest example of official pressure on foreign investors as the Kremlin moves to tighten its grip on the country's vast energy resources.

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Shell's troubles also come at a time when the Russian government is moving aggressively to increase state control over its natural resources sector, especially oil and gas production.

Earlier Monday, a top official at the natural resources ministry said foreign company licenses on three energy projects -- ExxonMobil's Sakhalin-1 project, Shell's Sakhalin-2 and Total's Kharyaga Arctic oil field -- were at risk.

The ministry's director of government policy Sergei Fyodorov said that the licenses could be cancelled on the grounds that technical conditions were not being fulfilled, Interfax reported.

A report by the ministry in May attacked both ExxonMobil and Shell for inefficiency and cost overruns at Sakhalin-1 and Sakhalin-2, saying Russian companies should be given majority control of both projects.

Analysts said that Russia's growing desire for majority control of all major energy projects was the main motivation behind recent pressure on foreign companies.

"Everything that is happening around Sakhalin-2 can be interpreted as the Russian government's desire to have more control over these projects," said Andrei Gromadin, oil and gas analyst at MDM Bank.

Valery Nesterov, oil and gas analyst at Troika Dialog, called the stated environmental concerns "a pretext" and said the move could be "alarming" for other foreign investors.

"It just means that the state continues to tighten its grip over the oil sector," Nesterov said.