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The New York Times: Shell Tells of Setbacks in Russia and Off Nigeria



April 3, 2004


LONDON, April 2 - The Royal Dutch/Shell Group, under intense pressure to meet or exceed market expectations after its large reserve write-down in January, is running over budget at a large Russian development and will not draw oil from its Nigerian offshore project as soon as expected.


A Shell-run liquefied natural gas project, known as Sakhalin II, in the Sakhalin Islands in Russia's Far East, is proving more expensive than Shell expected. "There are cost pressures on the project," said Simon Buerk, a Shell spokesman.


The London Times reported on Friday that the project was $2 billion over budget, a figure Shell would not confirm. The Sakhalin project is expected to produce more than 200,000 barrels of oil and gas a day once it is running.


Factors raising the project's cost include "movements in the foreign exchange rates and the growth in the regional economy," Mr. Buerk said.


The Sakhalin project needs raw materials and, with a boom in China, prices for those commodities have risen sharply. The project is still due to come on stream in 2007, as originally predicted, Mr. Buerk said. Shell is developing the field with two Japanese partners, Mitsui & Company and the Mitsubishi Corporation, which own 25 and 20 percent, respectively.


In Nigeria, a deepwater field off the coast will not begin pumping oil and gas until 2005, Shell said. This is the latest of several delays in the project, known as Bonga. In 2001, Shell executives said it would come online in 2003. In February, they said Bonga would begin production at the end of 2004.


"We have some challenges to deal with on Bonga," Mr. Buerk said. Additional offshore work is delaying the project, he added.


While the delays were disappointing, analysts said, they doubted the postponements would have any material impact on Shell's earnings.


"I am struggling to think of any project as big as Sakhalin that has ever run on time or on budget," said Neil McMahon, an analyst with Sanford C. Bernstein.


High oil prices are expected to keep profits strong, even if production targets are off, Mr. McMahon added.

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