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Scotland on Sunday: The true cost of Sakhalin II

Comment posted by John Donovan on
http://scotlandonsunday.scotsman.com/international.cfm?id=1410972006#new
(ARTICLE: “Putin pours scorn on defence and fuel fears”)

I operate a website – www.royaldutchshellplc.com – focused on the activities of Royal Dutch Shell Plc. With over 10,000 news articles, it is one of two websites recommended by Fortune Magazine for information about Shell. The other is Shell’s own portal website, www.shell.com. We also publish leaked Shell internal documents, plus comments and articles from Shell insiders.

The two paragraphs below are comments received from a Shell insider in relation to current moves by the Russian government in respect of the *$20 billion Sakhalin 2 project (double the sum originally projected by Shell).

“Shell negotiated a Production Sharing Agreement with the Russian government, under which the Russian government agreed to pay less than $10bn for the Sakhalin development, to be paid out of gas belonging to the Russian state. Only after sufficient gas had been produced and sold by Shell to pay the agreed development costs would benefits accrue to the Russians. By doubling the costs, without approval, the date at which the Russians will start to receive income on a comparable basis has been pushed back by several years, and the “Net Present Value” (NPV) of the project for the Russians is therefore reduced to almost zero.”

“Gas fields and production facilities do not last forever, and by the time Shell have amortised the currently estimated development costs the Sakhalin fields will be starting to decline, and the production facilities will be reaching the end of their design life. So the Russians will have provided the gas, and received little or nothing in return, other than a depleted field, extinct whales, a damaged environment and some rusting facilities. Who can blame the Russians for being somewhat angered that a key national asset is being squandered?”

*An article published in The Observer today (“Moscow makes its power play”) mentions a cost overrun figure of $25 billion. This almost tallies with the $26 billion sum we have been reporting from our insider sources for several months.

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