Russia stepped up the pressure on Royal Dutch Shell and its Japanese partners yesterday over a $20 billion oil and gas development in the Far East, sparking protests from Tokyo and Brussels.

In the latest blow to Sakhalin-2, one of the world's biggest energy projects, Russian gas monopoly Gazprom suspended asset swap talks with operator Shell.

This followed a Russian decision on Monday to revoke environmental approval for the project because of allegations that Shell had violated their terms. Shell denies this.

The European Commission said it was taking Russia's withdrawal of the permits "very seriously" and called on Moscow to guarantee a secure and predictable investment climate.

Japan's prime minister-in-waiting Shinzo Abe said major delays to Sakhalin could hurt diplomatic relations between Moscow and Tokyo. Japan's Mitsui & Co Ltd and Mitsubishi Corp own a combined stake of 45 per cent in Sakhalin-2. Import-dependent Japan will be a major customer.

Royal Dutch Shell shares fell 1.7 per cent on the news. Analyst suspect the Kremlin will ratchet up the pressure to the point where Shell would be forced to surrender long-established production deals to give Russia a bigger slice.

"The Russians want in, full stop," said UBS's chief Moscow economist Al Breach. "Russia does not want these big fields run by foreign companies. They are putting pressure on Shell to come to a deal. It's all about money."

Sakhalin-2 involves the construction of the world's biggest liquefied natural gas (LNG) plant with capacity of 9.6 million tonnes a year that would supply customers in Japan, the United States and Asian countries.

Shell has spent upwards of $10 billion on Sakhalin-2, on the remote, mountainous Pacific island of Sakhalin which is freezing cold in winter. The project is due to go on stream in 2008 and much of the initial production has already found customers.

Until August, the company said it had worked in step with Russian regulators to fulfil all the necessary regulations, winning around 3,500 separate approvals and permits.

Diplomats in Moscow mounted a big lobbying drive to salvage the Sakhalin-2 deal, Russia's largest foreign investment.

"We are deeply concerned," Britain's ambassador to Russia Tony Brenton told Reuters.

Analysts said Russia is trying to force foreign oil majors to give up part or all of their advantageous production sharing agreements (PSAs), which were negotiated at a time of much lower global oil prices.

The PSA which Shell signed back in 1993 does not allow Russia to unilaterally terminate the project. But record oil prices mean Russia is losing out on potential revenue.

"The Russians are putting a straw in our drink, and it's all very bare-knuckle," said a senior Western diplomat.

"When you have gas, oil, pipe in the same sentence, you have a constellation of very high interests inside the Kremlin."

Analysts said Russia also wanted to help its national gas champion Gazprom to get better terms for a stake in the project.

Factbox - Russia's Sakhalin oil, gas projects

Russia's Gazprom said yesterday it had suspended assets swap talks with Royal Dutch Shell because of uncertainty over Shell's Sakhalin-2 oil and gas project, dealing another blow to the $20 billion venture.

In Brussels, the European Commission said it was taking "very seriously" Russia's decision, announced on Monday, to revoke environmental approvals for Sakhalin-2 in Russia's far east.

Gazprom had planned to swap half of a giant Siberian gas field for a 25 per cent stake in Sakhalin-2, the world's biggest liquefied natural gas (LNG) project off Russia's Pacific coast.

For story please click on. The Sakhalin oil and gas projects are potentially among the most ambitious of the 21st century, tapping billions of barrels of reserves in seas that freeze for up to six months.

Following are details of some of the main projects.

Sakhalin-1
The Exxon Mobil-led project, which is costing more than $12.8 billion, ranks with Saudi Arabia's Haradh field and the Baku-Ceyhan pipeline from the Caspian as one of the year's three-biggest developments helping to meet rising global demand.

Sakhalin-1 will provide the biggest new source of Pacific basin crude in over a decade and, according to Exxon chief executive officer Rex Tillerson, should be producing 225,000 barrels per day by the end of the year.

The venture is developing three oil and gas fields - Chayvo, Odoptu and Arkutun-Dagi. They hold estimated recoverable reserves of 2.3 billion barrels of oil and 17.1 trillion cubic feet of natural gas, according to Exxon.

Japan's Nippon Oil Corp. said on August 23 it had made the first purchase of crude oil from Sakhalin-1.

But on September 18, the head of a regional environmental watchdog questioned the ecological and technical readiness of Exxon Mobil's oil export terminal, just weeks before its launch, and said it should undergo more checks.

Sakhalin-2
A Royal Dutch Shell-led group is building what the company says is the world's largest single oil and gas project on Sakhalin Island, an expansion of Sakhalin-2.

The second phase of Sakhalin-2 will tap the Piltun Astokhskoye oil field and the Lunskoye gas field, which together hold about 1 billion barrels of crude and 500 billion cubic metres of natural gas. The first started up in 1999.

The project is also one of the most environmentally challenging because the oil and gas lies under the feeding grounds of critically endangered whales and must be exported via a new pipeline that will cross 1,100 rivers and streams.

Costs have doubled from an earlier estimate of $10 billion, leading to tension between Shell and the Kremlin, and shipments are set to start later than earlier planned.

Sakhalin-2 aims to export the first cargo of liquefied natural gas (LNG) in the summer of 2008, six months later than earlier planned. The operator, Sakhalin Energy, said on Monday Russia's move to revoke ecological approval may delay the project further.

Shell holds 55 per cent of Sakhalin-2, which is designed to produce up to 9.6 million tonnes of LNG a year.

Japan's Mitsui & Co. and Mitsubishi Corp. hold the remaining shares in Sakhalin-2, with 25 per cent and 20 per cent respectively.

Sakhalin-3
Russia's Rosneft and China's Sinopec have started drilling the first exploration well on their joint Sakhalin-3 project, news agencies reported on August 7.

Rosneft and Sinopec agreed to jointly explore the Veninsky block during a visit of Chinese President Hu Jintao to Moscow in July 2005. It became China's first energy project in Russia.

Rosneft, which has 49.8 per cent in the venture, has estimated the field's reserves at 168 million tonnes of oil and 258 billion cubic metres of gas. Sinopec, Asia's biggest refiner, has 25.1 per cent.

Sakhalin-4, 5
Rosneft holds 51 per cent of Sakhalin-4 and Sakhalin-5, which it says are at the early stages of exploration.

Rosneft has a joint venture with BP Plc to explore in the Sakhalin-5 area.

The venture has already drilled one well this year and plans to drill another, said BP spokesman Robert Wine.

BP says it has carried out preliminary work to bring into production any find it makes that is worth developing.

BP, a pioneer of the boom in Russian oil investment, kept its Sakhalin interests separate from its Russian oil joint venture, TNK-BP, formed in 2003.