Lloyds List: Audit demanded on Sakhalin costs: Rising expense of Shell project alarms Russian authorities...": RUSSIAN authorities worried about delays to tax revenues have ordered an audit on the rising costs of Shell's Sakhalin II project.”: 'The Russian President Vladimir Putin is quite opposed to plans on the part of the Sakhalin II operator to make a substantial increase in the costs of the project.”: Friday Dec 02, 2005

Rising expense of Shell project alarms Russian authorities, writes Martyn Wingrove:

RUSSIAN authorities worried about delays to tax revenues have ordered an audit on the rising costs of Shell's Sakhalin II project.

A doubling of the capital costs to $20bn for the second phase has displeased the Russian government and state authorities because this postpones oil profit payments under production sharing agreements.

Sakhalin Energy Investment is developing two offshore fields with production platforms and one onshore processing centre under the Sakhalin II PSA off eastern Russia.

The project also includes the island's longest pipelines, a liquefied natural gas plant and oil terminal, with exports set to begin in 2008.

Already the state has formed a working group looking into the revised project budget, which is affected by higher pipeline costs, delays to construction work and rising equipment and steel costs.

'The Ministry of Industry and Energy and our administration are not happy with the increased costs because the project will be paying for itself much later, which delays benefits for our treasury,' said Galina Pavlova, a department director in the Sakhalin administration.

'Under this new budget profit oil will be coming to the Russian side much later than envisioned,' she said at IBC Energy's Sakhalin Oil and Gas Conference.

'The Russian President Vladimir Putin is quite opposed to plans on the part of the Sakhalin II operator to make a substantial increase in the costs of the project.

'So we are tendering for an independent audit and shareholders in Sakhalin II must prove why costs have risen.'

Ian Craig, chief executive of Sakhalin Energy, told delegates that the budget was doubled to $20bn for all work to 2014 and the revised unit costs were between $5 and $6 per barrel of oil equivalent.

'The lengthening of the construction schedule means the budget has increased,' he said.

'There have been design adjustments, some on the recommendation of the Russian authorities.

'Increased demand for equipment and services has led to inflation and costs rising.'

Dr Pavlova is also unhappy with the volume of Russian content in projects.

'We are not satisfied with the average percentage of Russian Federation participation, 65% in Exxon Neftgas' Sakhalin I project and 35-45% in Sakhalin II,' she said.

'We think that during the construction period this percentage should be at least 70%, while in the exploitation period it should rise to 80% and 95%, depending on the type of facility.'

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