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The Moscow Times: Shell: Putin Did Not Talk Costs: "Royal Dutch Shell on Wednesday denied a report that President Vladimir Putin had criticized the rising cost of developing the Sakhalin-2 production field": Thursday, November 3, 2005

Issue 3288. Page 5.

By Valeria Korchagina
Staff Writer


The cost of the second phase of Sakhalin-2 is estimated to hit $20bln.

Royal Dutch Shell on Wednesday denied a report that President Vladimir Putin had criticized the rising cost of developing the Sakhalin-2 production field during his state visit to the Netherlands.

The oil major's anticipated increase in costs for the second phase of the project would not be allowed to rise to $20 billion, Putin was cited by Kommersant as saying, with rising costs potentially impacting the state's future income on the project.

"No figures were discussed," Maksim Shoob, spokesman for Shell's Moscow office, said Wednesday, adding that Sakhalin-2 was discussed generally in Putin's meetings with Dutch businessmen. The presidential press service declined to comment.

At the root of the debate is a plan announced in July by Sakhalin Energy -- the Shell-led consortium developing Sakhalin-2 -- to roughly double the budget for the key second phase of the project to $20 billion.

The new budget has yet to be approved by various Russian government bodies still awaiting information on the reasons behind the increases, the Industry and Energy Ministry said Wednesday.

Keeping the development costs to a minimum is in Russia's interest because of the way the fields were divided in a production-sharing agreement signed in 1994 by Sakhalin Energy, the federal government and the Sakhalin regional administration.


Until Shell and other investors have recovered project development expenses, Russia does not have any right to any of the fields' oil or gas, collecting only basic royalties. In addition, Russia can only start collecting 32 percent tax on the project's revenues after investors have recouped costs.

So far, project costs have amounted to about $6 billion, with the bill footed by Shell and its foreign project partners. Shell blames the increase in the project's budget on rising costs for steel and shipping as well as on unfavorable currency fluctuations.

Rerouting an underwater pipeline around one of Sakhalin's bays in order to protect the natural habitat of an endangered gray whale population also pushed up initial estimates, a Sakhalin Energy spokesman said Wednesday.

 Putin said he would give any request by the Netherlands to participate in Gazprom's project to bring Russian gas to Europe "great attention" after a meeting with Dutch Prime Minister Jan Peter Balkenende Wednesday, Bloomberg reported.

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