29 September 2006
Expert comments on the Sakhalin II situation by a Shell Insider…
The costs of Sakhalin have doubled, so the payback time is approximately doubled. If 2013 is the new estimate for breakeven, based on a start up in 2008 and $22bn costs, then it is fair to assume that the date should have been 2009, based on $10bn costs and start-up in 2007 – as per the PSA.
(1) Apart from the $12bn in extra costs to be paid by the Russians (how much of this is Shell “overhead”?) an NPV calculation shows that the value of the future income stream due to the four year delay, and assuming a discount rate of 12% (typical for upstream E&P projects) is reduced by 60%.
(2) Shell calculates the costs of delaying the project by one year as $10bn. The $10bn includes $5bn as the notional cost of delaying the income stream by one year. However, the cost overrun and the delay in start-up means that the Russians are being asked to wait an extra four years for their income already, which by Shell’s own calculations is going to represent a cost of $20bn ($5bn x 4 years).
Whether Shell’s figures (2), or the NPV calculation (1) is used, the true additional cost to the Russians of the extra $12bn in costs and a one year delay (to 2008) of first exports is going to be over $30bn
The $2bn annual cost (quoted by Shell) of buying LNG elsewhere to fulfil the Sakhalin contract in case of a delay implies that the price to be paid by the Japanese for Sakhalin gas is too low: if Sakhalin gas was being sold at a market price, it would be possible to replace the gas on the world market at approximately the same price for which it was being sold.
It is hardly surprising that the Russians are questioning the viability of the project.