Russia's energy sector was almost fully privatised in a period of economic turmoil after the fall of the Soviet Union in 1990s and control over the country's resources effectively slipped away from government control.

President Vladimir Putin has reversed this policy, presiding over the dismemberment of Yukos, which was once the country's largest oil producer, and promoting two huge state-controlled energy firms, Rosneft and Gazprom.

The move by Russia's natural resources ministry on Monday to cancel an environmental permit necessary for work at Sakhalin-2 effectively suspends the energy project, which is being developed by a Western consortium led by Shell off Russia's Pacific coast.

The 20-billion-dollar programme -- the world's biggest privately funded energy project -- has been heavily criticised by environmental groups for alleged breaches.

But energy analysts said environmental concerns were a pretext for behind-the-scene manoeuvring to give Russian state-backed energy companies a greater stake in projects dominated by foreign firms.

"Living in Russia, I'm surprised about such concern about the environment, especially on such a far away island," Nesterov said.

Andrei Gromadin, an expert from Russia's MDM Bank, agreed.

"I don't exclude that there are some breaches but it's difficult to imagine that this project has been going on for so long and suddenly just now they've found all these problems," Gromadin said.

Analysts said Sakhalin-2 is particularly resented by Russian authorities as it falls under one of three production sharing agreements (PSAs) concluded between Western oil majors and the Russian government in the 1990s.

"Russia is strong-arming to try to force a deal that would change the ownership structure of these things," said Al Breach, an analyst with UBS Warburg.

Gromadin explained that "the state has very few instruments for control" over a PSA, which isolates companies from changes to tax laws and only feeds money back to the state once energy firms recoup their investment.

"The state can no longer accept the PSAs," Gromadin said.

The Exxon-led consortium developing the Sakhalin-1 field and Total, which is working on the Kharyaga oil field in the far north of Russia, are the two other PSAs in Russia.

But Nesterov said the government's tactics to influence the PSAs were "alarming" foreign investors and pointed to a "volatile" energy policy in Russia that cannot be sustained.

Related Links
Powering The World in the 21st Century