Russia's Gazprom said on Tuesday 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 (10.6 billion pound) 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 percent stake in Sakhalin 2, the world's biggest liquefied natural gas (LNG) project off Russia's Pacific coast.
We have learnt about the withdrawal of ecological approval (for Sakhalin 2) from the press and it was news to us, spokesman Sergei Kupriyanov told Reuters.
As far as our assets swap talks are concerned they haven't progressed for more than a year after Sakhalin 2 declared changes to the initial economic parameters of the project, which have yet to be approved by the Russian Federation.
In this situation, we cannot continue talks, he said.
There was no immediate comment from Shell.
Its shares fell from 1753 pence before the news to 1737 shortly afterwards a slide of nearly one percent. At 08:28 GMT (9:28 a.m. British time) the stock was down 0.06 percent at 1740 pence, lagging the DJ Stoxx European oil and gas sector index which was up 1 percent.
Gazprom had planned to swap 50 percent in lower deposits of its Siberian Zapolyarnoye field against a 25 percent stake in Sakhalin 2, which will eventually supply LNG to customers in Japan and the United States.
But the plan ran into trouble after Sakhalin 2, the biggest single foreign investment in Russia, said project costs would double to $20 billion (10.6 billion pounds), while the first LNG delivery would be postponed by six months to summer 2008.
The Russian government has so far declined to approve the cost overrun, while state agencies have attacked Shell for breaking the environmental terms of the project.
The tensions climaxed on Monday, when the Resources Ministry revoked ecological approvals for the second and main phase of Sakhalin 2 and it may require more than six months for the project to seek a new permit.
Analysts have said Russia's ultimate goal was not to withdraw production licences or paralyse the project but to help Gazprom get a stake in Sakhalin 2 on better terms.
They have also said the Kremlin was seeking to replace Sakhalin's production sharing agreement, which was signed in the early 1990s at a time of very low oil prices.
Royal Dutch Shell has a 55 percent stake as the operator of the project. The other shareholders are Japan's Mitsui & Co. Ltd. with a 25 percent stake, and Mitsubishi Corp. with 20 percent.
Sakhalin 2 already produces over 70,000 barrels of oil per day for around half the year as part of phasem 1, but plans to more than double that output during phase 2.
Phase 2 also involves construction of the world's biggest liquefied natural gas (LNG) plant with capacity of 9.6 million tonnes a year.