EBRD withdraws from talks on funding Sakhalin II-1

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(Adds details, background quotes in paras 2, 4-11)

LONDON, August 7 (RIA Novosti) - The European Bank for Reconstruction and Development (EBRD) said in a press release Tuesday that it would withdraw from negotiations on funding the Sakhalin II oil and gas project in Russia's Far East.

The EBRD withdrew from active consideration of the ambitious project in January because of a significant change in the stock allocation of Sakhalin Energy and the new shareholders were reviewing the financing plans.

"By mutual agreement with [Russian energy giant] Gazprom and other shareholders on the Sakhalin Energy Investment Company, it has been decided that the EBRD will not resume negotiations on financing the Sakhalin II project," the bank said.

Formerly led by Anglo-Dutch oil giant Shell, the project experienced months of intense pressure last year from Russian authorities, who accused it of causing serious environmental damage to Sakhalin Island, including deforestation, dumping toxic waste, and soil erosion.

The dispute was largely resolved when Gazprom [RTS: GAZP], which acquired a controlling stake in the project last December, and the authorities coordinated a plan to repair the damage in April.

The stakes held by the other partners, Royal Dutch Shell, Mitsui, and Mitsubishi, halved to 27.5%, 12.5% and 10% respectively, as a result of the deal.

The bank said that in informal discussions since then, it became clear that considering the timetable proposed by the shareholders, EBRD financing for the project was unfeasible.

"Gazprom, the majority shareholder, and the other shareholders of Sakhalin Energy have reached an advanced stage in the negotiations over financing of Sakhalin II and now expect to reach financial closure in the next few months," the EBRD said.

The EBRD was expected to offer a loan worth some $300 million. Although not large for a project of that scale, the loan would have a significant effect on the project as the bank's participation in Sakhalin II would have proven the project's compliance with high international environmental and social standards.

Gazprom said the bank's withdrawal from the financing of the $20-billion project would not affect its implementation, and the EBRD said it was considering with Gazprom focusing on cooperation in other projects - such as promoting sustainable energy - "where the experience and expertise of the EBRD could add significant value to Gazprom and Russia."

Sakhalin II has estimated reserves of 150 million metric tons (1.1 billion barrels) of oil and 500 billion cubic meters of natural gas. The project also comprises a liquid natural gas (LNG) plant, with a capacity of 9.6 million metric tons a year, which is due to be launched in 2008, and an LNG export terminal. Most of the LNG from the project will be exported to Japan.

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