Royal Dutch Shell Group .com

The Independent (UK): Putin savages Shell over soaring Sakhalin bill: “Shell has acknowledged a conversation with Mr Putin took place on Tuesday.”: Thursday November 03, 2005


Andrew Osborn in Moscow


The Russian President Vladimir Putin has launched a withering attack on the Anglo-Dutch energy giant Royal Dutch Shell's activities, dealing a potentially serious blow to the company's future profitability in Russia.


In a meeting with Shell executives in the Netherlands during an official visit on Tuesday, Mr Putin is reported to have criticised the group for massive cost overruns at its multibillion-dollar oil and gas project in the Russian Far East.


Sakhalin-2 is one of the largest direct foreign investments in Russia but Daily Kommersant said Mr Putin told the group's chief executive Jeroen van der Veer the Kremlin would not allow the energy titan to double its investment to $20bn (pounds 11bn) as it has requested.


What Mr Putin says matters because Shell does not have a free hand in deciding the project's budget because of a special revenue-sharing contract with the Russian government. Under that deal Moscow retains ownership rights over the oil and gas fields while Shell and the project's other investors have to foot the investment bill.


In exchange the Russian state receives a slice of the profits and therein lies Mr Putin's problem. He believes that if Shell is allowed to increase its investment above the $10bn initially envisaged it will delay the moment when the Russian state begins to reap serious revenues from the project. Shell has acknowledged a conversation with Mr Putin took place on Tuesday.


In July, it said Sakhalin-2, which will include the world's largest liquefied natural gas plant, would cost $10bn more than expected.


If Mr Putin sticks to his stance on the issue analysts believe that Shell and its partners will see their profits cut sharply. 'This would be another blow for Shell in Russia.... We estimate it will further depress the project IRR (internal rate of return) from an already low 12 percent to 8.5 percent,' analysts at Citigroup said.


Mr Putin was reported to be unusually well briefed on the subject, and is said to have urged Shell to make good on a preliminary agreement it has signed with the Russian energy giant Gazprom to swap a 25 per cent stake in Sakhalin-2 for a stake in a Siberian gas field.


Shell and its partners face pressure from the Russian Audit Chamber which has urged the government to renegotiate the deal. 


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