SHELL was threatened with prosecution for alleged destruction of forestry yesterday as its conflict with the Russian Government over the Sakhalin-2 oil and gas project intensified.

Russia’s Natural Resources Ministry claimed that criminal damage worth at least 11 million roubles (£220,000) had been done to forests during construction of a pipeline across Sakhalin Island.

Oleg Mitvol, the ministry’s deputy head of environmental inspection, told reporters in Moscow: “First, I think there will be criminal cases opened for destruction of the forest. Then we’ll look at all other issues.”

The allegation appeared to contradict efforts by other Russian authorities yesterday to reassure Japan and the European Union that work on the vast Sakhalin-2 field would continue despite a shock decision on Monday to revoke an environmental permit.

The project is the world’s largest privately funded energy venture. Shell has a 55 per cent stake, with the rest shared by the Japanese companies Mitsui and Mitsubishi.

Japan and the EU reacted sharply to withdrawal of the permit, which threatened to halt the project for at least six months in a dispute over rising costs. But Kirill Androsov, Russia’s Deputy Economy Minister, said: “I don’t see any reason to stop work on the project before the end of the technical economic assessment.”

Alexander Losyukov, Russia’s Ambassador to Japan, also sought to ease tensions, saying that Moscow wanted speedy completion of the project and would respect its obligations under an agreement with the consortium. “Russia has no intention of ending or freezing the Sakhalin-2 project,” he told the Itar-Tass news agency in Tokyo. “We are interested in the project working fully and in receiving the benefits from it that we are expecting.”

Russia was furious after Shell announced that costs for the project would be $20 billion (£10.6 billion), twice last year’s estimate. Under a production- sharing agreement, the consortium is entitled to recover investment costs before sharing revenues with Russia.

Government officials have complained that the State would lose $10 billion under the revised estimate of costs. Any disruption to the project could delay Shell’s deliveries of 9.6 million tonnes a year of liquefied natural gas to Japan and Korea, due to begin in 2008.

Ivan Chernyakhovsky, a spokesman for the consortium, said that work was continuing. “As we haven’t been served any official notice, the construction continues as planned,” he said.

The dispute is widely seen as an attempt by Russia to ratchet up pressure on the consortium to provide a stake for Gazprom, its state-run gas utility.

The threat to Shell’s permit comes as the Anglo-Dutch company is struggling to reach agreement with Gazprom on an asset swap that would give the Russian group a quarter share of the Sakhalin project. Talks broke down last year after Shell doubled its estimate of production costs.

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