The twelve-year-old Shell-led project had been beset by project delays, cost overruns, and environmental violations. NGOs such as Sakhalin Environment Watch and the World Wildlife Fund had been heavily critical of Sakhalin II, while critics of Gazprom have voiced concern that Russia’s Ministry of Natural Resources had arbitrarily singled out the project for punishment as part of a campaign to wrest control of the Sakhalin gas fields.

In autumn 2005, Sakhalin Energy, the developer of the Sakhalin 2 project owned jointly by Shell, Mitsui and Mitsubishi, revised the project’s cost estimate from US$10 billion to US$19.4 billion. In September, the Russian government cancelled the environmental permit for Sakhalin II, effectively halting the project.

Costs of reversing environmental damage “were considered and included in our payment when we entered the Sakhalin project,” according to Gazprom deputy CEO Alexander Medvedev.

The Hague-based Shell and its partners have invested US$12 billion in Sakhalin II, which includes Russia’s first liquefied natural gas project. Shell’s stake will fall to 27.5%, with Mitsui retaining 12.5% and Mitsubishi 10%.

Today, the Nihon Keizai Shimbun reported that under the terms of the sale agreement the three non-Russian partners agreed to relinquish US$3.6 billion dollars in development costs of the project.

Under the original production-sharing agreement signed in 1994, the project developers were allowed to recoup their investment in the initial stage of the production. Because of this, Russia would receive profits from the project only after the revenue had reached a certain level.

Under the new deal, the three companies agreed to exclude US$3.6 billion dollars from the roughly 10-billion dollar increase in the cost estimate. This allows Russia to receive profits that are similar to what was projected initially despite the cost increase.

In exchange for agreeing to terms that are advantageous to Russia, the three firms are believed to have secured the government’s promise that the basic framework of deal, which guarantees profit sharing for more than 20 years, will be maintained.

Sakhalin II is the largest integrated oil and gas project in the world, with total resources of some 4 billion barrels oil equivalent. The project today has production capacity of 80,000 barrels oil equivalent per day. The next phase of the development will take the project capacity to 340,000 barrels oil equivalent per day, including 9.6 million tonnes per year of liquefied natural gas (LNG) production.

Gazprom already had more gas reserves than any other gas company in the world, with about 17% of the world’s proven gas reserves, and more than 60% of Russia’s reserves.