Letter to TheBusinessOnline regarding their article: Shell facing a rough ride over its Sakhalin Island gas project…
From John Donovan: 20 August 2006
The Stock Exchange listing particulars published on 19 May 2005 for the merger of The “Shell” Transport and Trading Company and Royal Dutch Petroleum Company stated: “Overall investment in the Sakhalin II project is expected to be over $10 billion.”
On 8 July 2005, news broke about Shell’s plans to agree a multi-billion dollar asset swap with Gazprom. Jeroen van der Veer, the Chief Executive of the unified company, Royal Dutch Shell Plc, described the deal as a “win-win” situation for both companies, giving Gazprom an entry to sell gas into the lucrative American and Asia-Pacific market while Shell was gaining more reserves in Russia. He said the deal “tees up” future acquisitions for Shell in Russia. We were told that the deal was related to Shell recovering its credibility by restructuring, after inconveniently losing 25pc of its “proven” oil and gas. At the time, Mr Van der Veer denied suggestions that there had been pressure from the Kremlin to give Gazprom a stake in Sakhalin II.
On 21 July 2005, newspapers reported that SHELL had failed to disclose at its unification AGM held on 28 June 2005, the massive cost overruns at Sakhalin II, involving a doubling of the budget to $20 billion. Although an internal audit team had been commissioned by Van der Veer to investigate the mounting problems at Sakhalin II, nothing of this was disclosed to shareholders at the AGM. It was another case of cover-up and deceit in line with the reserves scandal. Shell management had the audacity to commence and end the London end of the AGM with Bing Crosby singing one of the most famous and successful advertising jingles of all time – “You can be Sure of Shell… Under the circumstances, Bing must be turning in his grave…
My information from Shell insider sources is that in fact, the projected budget cost for the project is now estimated at a staggering $26 billion. As Shell management is aware, a member of my family wrote to President Putin in November 2005 advising him of the $26 billion figure, a sum which Shell has not denied. Perhaps Shell management would care to comment now?
President Putin of Russia has vented his anger about the Sakhalin II cost escalation in a face-to-face meeting with Van der Veer. Obviously there is a great deal of manoeuvring going on, with the Russia government using its immense leverage to achieve its own objectives. It is a safe bet to predict that Shell will soon be reduced to being a minority player instead of the lead partner in the mega project. The loss of face, reserves and potential profits will be considerable. Once again, Shell shareholders will suffer for management incompetence.
The reserves scandal has already cost Shell shareholders a fortune: $150 million in financial regulator fines; over $100 million in class action settlements already agreed and $500 million set aside for the consolidated action. Can we expect further Class Action lawsuits in relation to the Sakhalin II debacle?
There is only one thing which has saved the current senior Shell management – the one factor which is not in their control: the record high oil prices which fund their massive remuneration/pension packages and the new, luxury executive jet fleet.
From John Donovan
A long term Shell shareholder and co-operator of one of the two websites recommended by Fortune magazine and CNNMoney.com for information about Royal Dutch Shell Plc – www.royaldutchshellplc.com: The other recommended website is www.shell.com