Friends of the Earth: Shell Overstates Sakhalin Benefits: “Royal Dutch/Shell is drastically over-stating the income to be received by Russia from a major project in the country's Far East, according to a study from a leading energy economist”: “Shell is up to its old tricks again, but this time the Russian economy is set to suffer because of this gross massaging of the figures.”: “Despite its fine words, Shell is ripping off the Russian state…” (ShellNews.net) 30 Nov 04
Nov 30 2004
Royal Dutch/Shell is drastically over-stating the income to be received by Russia from a major project in the country's Far East, according to a study  from a leading energy economist. Shell recently launched a "charm offensive" to boost the controversial Sakhalin II project, claiming that the state will receive USD 45 billion in direct income over the 49 year lifetime of the project.
According to economist Dr Ian Rutledge, this figure is totally unrealistic and misleading as "no oil company would measure its own cash flow or profits in this manner". Because of this and other aspects of the contract that represent a "major departure from standard PSA terms worldwide," the study documents that "the benefits which flow to the Russian party…fall a long way short of those which would have been received had a `standard' type PSA been used…(in which) the Russian party would receive 45% more economic rent."
Commissioned by an international coalition of non-governmental organisations, "The Sakhalin II PSA - a Production 'Non-Sharing' Agreement" describes the highly unusual, pro-consortium terms of the Sakhalin II PSA (Production Sharing Agreement) whereby most of the project's investment risk will be carried by the Russian state and, moreover, the Russian government is set to receive its share of the revenues only after SEIC's profit is assured.
Dmitry Lisitsyn, of Sakhalin Environment Watch, commented:
"Shell is up to its old tricks again, but this time the Russian economy is set to suffer because of this gross massaging of the figures. When a project is as badly conceived across the board as Sakhalin II is, you can either sort it out or spin it. As this new study illustrates, Shell remains firmly committed to spin."
In summer 2004 SEIC announced a reported 20 per cent cost increase on Sakhalin II, from USD 10 billion to USD 12 billion. Given the inequities of the PSA, the economic impact of any cost over-run will be felt primarily as a loss of income to the state, rather than as a loss of profits to the consortium.
The Sakhalin II project has been mired in controversy. The construction associated with the project - one gas and two oil platforms, pipelines, a liquid natural gas plant, and more - threatens salmon runs and the local economies that depend on them and, to the alarm of the international conservation community and the International Whaling Commission, poses a direct threat to the critically endangered population of 100 remaining Western Pacific Gray Whales.
The European Bank for Reconstruction and Development (EBRD) is currently considering financing the second phase of Sakhalin II in what is the third largest Project Finance deal ever undertaken. Yet, as the study points out, the "non-sharing" nature of the PSA should rule out EBRD involvement in the project.
Petr Hlobil, of CEE Bankwatch Network, said:
"The EBRD should not finance Sakhalin II not only because of the project's dire environmental implications, but also because there is no beneficial transition impact of backing a project whose legal framework drastically privileges private oil companies over a developing economy that the EBRD is supposed to be helping to adapt to western market democracy. The Bank is now reviewing its Energy and Natural Resources policy and it must commit to releasing standardised analyses of the national, regional and local benefits for every project it finances in the future."
Friends of the Earth Oil Campaigner Nick Rau said:
"Despite its fine words, Shell is ripping off the Russian state and running the risk of depriving people on Sakhalin of their livelihoods. What is more, Shell is asking for taxpayers money to kick start this development through the EBRD. This project needs to be completely reviewed. Shell is set to reap the profits, leaving Russia to bear the costs."
Even in spite of such favourable terms for the consortium, the study warns of the project's viability for international investors.
Greg Muttitt, of PLATFORM, said:
"Dr Rutledge has shown that due to Shell's inability to control its costs, the project is only viable if the oil price stays high. Banks like ABN Amro and Royal Bank of Scotland should question whether the project finances stack up, and whether they want to be associated with a project which extracts Russia's oil reserves for a pittance"
This analysis will only add to the substantial controversy already raging in Russia over whether Production Sharing Agreements with western oil companies are in the country's interests. "It is understandable if Russia considers the Sakhalin II PSA a `Shell Game,'" said Doug Norlen, of Pacific Environment.
A copy of Dr Ian Rutledge's analysis is available as a PDF file on request
1. "The Sakhalin II PSA - a Production 'Non-Sharing' Agreement" - an analysis of Revenue Distribution by Dr Ian Rutledge of Sheffield Energy and Resources Information Services (SERIS) was commissioned and published by CEE Bankwatch Network, Friends of the Earth, Pacific Environment, Platform, Sakhalin Environment Watch and WWF.
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