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Russia's Natural Resources Ministry cancelled Royal Dutch Shell PLC's permit for the $20-billion (U.S.) Sakhalin-2 oil and gas development, as President Vladimir Putin tightens his control over the country's energy industry.

The Natural Resources Ministry said yesterday in a statement it asked the Russian agency responsible for authorizing oil and gas development to annul Shell's licence. The ministry may also revoke operating permits for Exxon Mobil Corp. and Total SA, Interfax reported earlier, citing an official from the same ministry.

State-run OAO Gazprom is seeking a stake in the Shell-led venture, the biggest foreign investment in Russia, and threats to shut it down may strengthen its negotiating position, said Craig Pennington of Schroders PLC. Mr. Putin built up Gazprom and OAO Rosneft using assets seized from OAO Yukos and is using them to assert the nation's importance as an energy supplier.

"It's all part of the bargaining for assets up for grabs in Sakhalin-2," said Mr. Pennington, leader of energy research at Schroders in London. "It's symptomatic of the Russian industry to take control of key assets at as low a cost as possible."

The Natural Resources Ministry in May urged Shell, Exxon and Total to cede more control of their ventures to Russian companies. Gazprom is in talks with Shell about swapping assets to acquire a 25-per-cent stake in Sakhalin-2.

A feasibility study upon which the Shell Sakhalin agreement was based would need to be resubmitted if the licence is cancelled, said Rinat Gizatulin, a spokesman for the Natural Resources Ministry. Shell could regain its licence after the study was resubmitted, a process that might take six months or longer, he said yesterday in a phone interview.

"We act in strict conformity with the [production sharing agreements]and Russian legislation and expect the Russian Federation to honour the PSA," Ivan Chernyakhovsky, Sakhalin Energy spokesman, said before the decision. He declined to comment on the ministry's cancellation of the permit.

The ministry in May also told BP PLC's Russian venture, OAO TNK-BP holding, it must reach an accord with state-run OAO Gazprom to revive an $18-billion Siberian natural gas venture. Gazprom is in talks to buy the 50 per cent of TNK-BP that BP doesn't own, Russian business daily Vedomosti reported yesterday, citing Gazprom officials.

Gazprom spokesman Sergei Kupriyanov declined to comment on the Vedomosti report.

Exxon runs the Sakhalin-1 project with partners that include state oil company Rosneft, which holds 20 per cent. Rosneft's participation may mean the government leaves Exxon's project in peace even after the Sakhalin-1 budget was raised to $17-billion from $12.8-billion, Kommersant newspaper reported yesterday, citing an unidentified government official.

"We have a very good relationship with the Sakhalin authorities and we'll continue to work through issues as they come up," Mark Albers, Exxon's president of development, told reporters during a conference in London yesterday. Exxon is not in danger of losing its Sakhalin-1 licence, he said.

Sakhalin is one of Russia's richest petroleum provinces, with as much oil and gas as the North Sea, attracting companies such as Exxon Mobil, BP and India's Oil & Natural Gas Corp. Shell is drilling in Russian-owned seas north of Japan as dwindling energy supplies force producers to venture into increasingly hostile locations. Costs for Sakhalin-2, the company's biggest single investment, have doubled to $20-billion, undermining Shell's effort to convince investors it can replace the oil it pumps, two years after overstating reserves.

The Prosecutor General's Office two days ago agreed with the Natural Resource Ministry's conclusion that the original permit for Sakhalin-2's second phase shouldn't have been approved, giving it the legal power to annul the 2003 decision.

Sakhalin-2, located seven time zones east of Moscow, is completely foreign-owned, with Shell holding 55 per cent, Mitsui Co. 25 per cent and Mitsubishi Co. 20 per cent. Shell expects deliveries of liquefied natural gas to start in 2008.

Earlier yesterday, Sergei Fyodorov, a Natural Resources Ministry official, said the Exxon and Total projects may also be cancelled for violating "technical" requirements of their licences, Interfax reported.

Mr. Gizatulin would neither confirm nor deny the Interfax report.

Total has a production sharing agreement that governs the Kharyaga oil field in northern Russia.

Oil island

A massive territory: Sakhalin Island, home to the world's largest oil and gas development, is a Russian territory stretching about 950 kilometres from tip to tip.

Behind the move: Russia's attempt to force the oil majors to give up part or all of their production sharing agreements reflects a wider trend of resource nationalism in countries from Latin America to Africa.

A different era: Russia signed three production sharing agreements in the 1990s, with Exxon and Shell on Sakhalin and with Total in Siberia, to attract foreign investments at a time of very low oil prices.

How big is it?

Windsor to Montreal, 828 km by highway driving

Sakhalin Island, 950 km tip to tip