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ShellNews.net: Final Cost of Sakhalin-2 will now be at least $26 Bn.: "A new Sakhalin management team recently completed a technical review of the project. It has concluded that the final cost will be at least $26bn.": Tuesday 18 October 2005: 00.30am GMT  

 

By Alfred Donovan

 

The Observer newspaper published an article on Sunday 16 October 2005 reporting that the “escalating financial crisis at one of Shell's most crucial energy projects, already massively over budget, has taken a turn for the worse.” It went on to say: “It is understood that the Sakhalin-2 gas and oil pipeline project, which originally had a budget of $10 billion, could now cost $22bn. The scheme will transport oil and gas from an island off the east coast of Russia.”

 

Information gained from a reliable source indicates that the cost will in fact be even higher than feared. A new Sakhalin management team recently completed a technical review of the project. It has concluded that the final cost will be at least $26bn.

 

As recently as June 2005 the estimated cost for the Sakhalin2 project in Russia was $10 billion (USD). In July, Shell announced that estimated project costs had doubled to a staggering $20 billion. As was stated in a July Daily Mail article about the Sakhalin-2 cost overrun debacle: "If a national government were to admit an error on such a scale the finance minister would almost certainly pay with their job.": "Daily Mail: Sakhalin shock": 17 July 2005: Read the article

 

Royal Dutch Shell Chief Executive Jeroen van der Veer has acknowledged in an interview with the Financial Times that Shell's reputation has already been severely damaged by the previous revised costs estimate. He was quoted as saying: "I fully realise it has an impact on our reputation - certainly for this project, and then of course I'm concerned it will carry over to other things that we do..." 

 

The fast escalating financial crisis had already prompted Gazprom, the state-owned Russian energy giant, to delay the asset swap deal that would have resulted in it acquiring a 25 per cent stake in Sakhalin-2. Gazprom will now insist on considering the implications of yet further colossal cost overruns on the project and is likely to use the situation to negotiate a larger slice of the Sakhalin-2 project. The renegotiation puts the whole Gazprom/Shell asset swap deal in jeopardy. That in turn puts Shell's recovery plan in peril.

 

The timing could not be worse for Shell which is desperate to secure a loan from the European Bank for Reconstruction and Development (the EBRD) to assist in funding Sakhalin-2. The sensitivity of the loan situation is heightened by the fact that campaigners are asking the EBRD to refuse to grant the loan because of concerns about the impact on the environment and in regard to the survival of the critically endangered Western Pacific grey whale.  

 

The Sakhalin2 costs overrun must now rank as the biggest financial  cock-up in corporate history.

 

ARTICLE ENDS

 

Message from Royal Dutch Shell Plc CEO, Jeroen ("the finger") van der Veer, to Russian President Putin, after Putin slams Sakhalin2 $16 billion (USD) cost overrun: Wednesday 2 Nov 2005

 

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*ABOUT THE AUTHOR: Alfred Donovan has had business dealings with Shell stretching back almost 50 years. In the 1980’s & 90’s the sales promotion company he founded with his son, John (Don Marketing) created and supplied multimillion dollar national promotions for Shell on an international basis. He and his son probably hold the world record for suing Shell, having subsequently brought a series of court actions: five for breach of confidence or breach of contract, and two for libel. They have never lost a case against Shell. Details about the litigation are published on ShellNews.net, the unique website owned by the Donovan’s. It contains the world’s largest collection of articles, news and reports focused on Royal Dutch Shell and its activities – astonishingly, over 6,000 web pages. Mr Donovan own and uses the registration to the dotcom domain name for Shell’s unified $200 billion (USD) company: Royal Dutch Shell Plc (royaldutchshellplc.com). Shell made an unsuccessful attempt to seize it by instituting proceedings via the World Intellectual Property Organisation in May 2005. A WIPO panel gave a unanimous verdict in favour of Mr Donovan in August. 


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