Russia's Environment agency Rosprirodnadzor, today said it was to file lawsuits against foreign oil companies developing the Sakhalin-2 oil and gas fields during early 2007. The agency estimated initial costs of the damage at $10 billions but could rise as high as $50 billion. Intense pressure from the Russian government is forcing Royal Dutch Shell to give up control of the lucrative $30 billion Sakhalin-2 project to state gas monopoly Gazprom as an attempt to elevate the pressure and get the project moving forward. Shell holds a controlling 55 percent stake in Sakhalin Energy. Japan's Mitsui and Mitsubishi own 25 percent and 20 percent.

Sakhalin-2 is being developed under a production sharing agreement, or PSA, which states that differences between shareholders and the Russian state are to be arbitrated in a court in Stockholm. The intense pressure being applied to the Sakhalin-2 project is in stark contrast to Sakhalin-1 which already has a major Russian shareholder , whereas Sakhalin-2 doesn't have a Russian shareholder. Russia also intends to claim lost revenue of $10 billions due to cost over-runs in the project, as the original agreement signed in 1994, allows Shell to recoup all of its expenditure before sharing any of the profits with the state. The original cost of the project was $12 billion, but that has now over run to $22 billion.

In total the Sakhalin-2 field holds some 1.1 billion barrels of crude oil and 500 billion cubic meters of natural gas.

Shells shares have fallen by some 15% from the peak set earlier in the year and trades on a PE of 8.61, as this coupled with even bigger problems in Nigeria where Shell has some 30% of its reserves, are likely to impact on future profits. This suggests that the Shell share price could sink further towards the low £17.00 where major support lies. Though the shares already by and large reflect this bad news so a more sustained drop below £17.00 looks unlikely.

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