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The Times: Shell's Russian gas project $2bn over budget in weeks


By Carl Mortished, International Business Editor

April 02, 2004  


SHELL’s troubled management faces new questions over internal accounting procedures today, as The Times reveals that one of the oil major’s key gas projects has spiralled more than $2 billion (£1.09 billion) over budget in just two months.


Sources close to Shell’s Sakhalin-2 natural gas development in Eastern Siberia have confirmed that the total cost of building Russia’s largest energy project is now more than 20 per cent in excess of the $10 billion budget presented to analysts in February.  


It is understood that an internal review of the project’s budget in recent weeks has uncovered additional costs in building the offshore platforms, pipelines and related infrastructure.


The cost-overruns will be a blow to the Anglo-Dutch group, which is under pressure to show it can raise its game after the recent shock over its misreporting of oil and gas reserves.


Sakhalin is one of Shell’s core investments, expected to contribute more than 200,000 barrels per day of additional oil and gas output. Giving the green light to the Sakhalin Energy Investment Company in May last year, Sir Philip Watts, then Shell’s chairman, described the venture as “a strategic legacy project for Shell (which would) reinforce Shell’s position as the world’s leader in liquefied natural gas”.


The sudden ballooning of the budget raises questions about the circumstances in which Sakhalin-2 was approved and why the economics have changed so rapidly since the investment decision in May.


Russia’s first liquefied natural gas project (LNG), Sakhalin was lauded as the biggest ever foreign investment in Russia and was granted the privilege of a special ring-fenced tax structure, one of a very few such agreements sanctioned by the Kremlin. Contracts have been signed with Japanese power generators, including Tokyo Electric, for the 17 trillion cubic feet of gas in the Piltun and Lunskoye fields, north of Sakhalin island.


Less than a year from launch, the budget increase will be a concern for Mitsui and Mitsubishi, Shell’s Japanese partners, which together own 45 per cent of Sakhalin Energy Investment Company and are liable for an equivalent portion of funding.


Budgeted amounts for offshore work and project management have all increased, sources indicate. Estimates of the cost of upgrading basic infrastructure, including roads, airports and facilities, have doubled and sources say that the expected cost of the two offshore platforms has risen by some $500 million. There are believed to be problems associated with pipeline routes.


A spokesman for Sakhalin Energy would not comment on specific figures but said the company was committed to delivering the first LNG cargoes in 2007. He said: “In a project of this size and complexity, which is being undertaken in a frontier area under difficult conditions, there are always unexpected events that put pressure on costs.” The spokesman said the budget covered an enormous level of activity and was reviewed regularly.,,5-1059864,00.html

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