Financial Times: Russia presses Shell over oil project cost: “The Kremlin this week balked at Shell’s request to double the cost of the project to $20bn (€16.5bn, £11.3bn). Russia’s energy ministry said in a statement: “The Russian side has questions to do with poorly grounded changes in the spending estimates.”: Thursday 3 November 2005

By Thomas Catan in London and Arkady Ostrovsky in Moscow

Royal Dutch Shell is coming under growing pressure from the Russian government over the rising cost of Sakhalin 2, one of the world’s largest offshore oil projects in which the Anglo-Dutch company has a 55 per cent stake.

The Kremlin this week balked at Shell’s request to double the cost of the project to $20bn (€16.5bn, £11.3bn). Russia’s energy ministry said in a statement: “The Russian side has questions to do with poorly grounded changes in the spending estimates.”

On a state visit to the Netherlands, Vladimir Putin, Russian president, is understood to have personally questioned Shell’s chief executive about soaring costs at the project and called for a strict accounting.

Shell confirmed that Mr Putin had spoken to its chief executive, Jeroen van der Veer, at a meeting on Tuesday of about 20 industrialists but provided few details of the conversation.

“Sakhalin 2 was discussed with President Putin,” Shell said. “We were encouraged to work with the relevant authorities, as we are doing, and to continue with the due process. No figures were discussed.”

In July Shell said its flagship Russian oil and liquefied natural gas project would cost $20bn – twice the original estimate – and start up some eight months late. The revised budget has to be signed off by the Russian government. Under the terms of its production sharing agreement, Shell is entitled to recoup its costs before the Russian government gets its share of revenues from the development.

A failure to approve the budget would be a big setback for Shell and could further hurt the economics of one of its most important projects.

It could also further complicate Shell’s other plans in Russia, which are central to the company’s plans to boost its flagging oil and gas production.

Shell is in the middle of delicate negotiations with Gazprom, the natural gas monopoly, over a proposed asset swap that would see the Russian company take a 25 per cent stake in Sakhalin 2 and Shell take a 50 per cent stake in Gazprom’s Zapolyarnoye-Neocomian gas field in northern Russia.

Because the Sakhalin 2 project was so well advanced, the parties originally expected a package of cash and other assets to benefit Shell.

Now many people close to the parties expect Shell to have to compensate Gazprom because of the huge increase in costs. 

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