By Torrey Clark
Oct. 22 (Bloomberg) — Russia and Royal Dutch Shell Plc should be able to settle budget and environmental disputes that threaten to halt work on Sakhalin-2, the nation’s largest foreign-owned oil and gas project, President Vladimir Putin said.
“We need to sit at the table and come to an agreement,” Putin said at a press conference Oct. 20 in Lahti, Finland. “I’m sure we’ll find a resolution,” he said.
Russian officials cited environmental and safety concerns last month when they threatened to annul a key permit for the project, possibly halting construction. Shell doubled its cost estimate for the project to $22 billion last year and stalled talks to give Russia’s state-controlled OAO Gazprom a 25 percent stake.
Putin questioned Sakhalin-2′s cost estimates for legal services, business trips and foreign personnel. Doubling the project’s costs would delay Russia’s profit for another 10 years, he said.
Sakhalin-2 is being developed under a so-called production sharing agreement, which allows investors to recover their costs before the state takes a profit. Other projects of this kind, run by Exxon Mobil Corp. and Total SA, have come under scrutiny for license and environmental violations, spurring concerns Putin is pressuring the companies to cede control to the state.
The Russian government will finish reviewing Sakhalin-2′s application for its budget increase at the “beginning of December,” Deputy Energy Minister Andrei Dementyev told reporters after a conference near Moscow on Oct. 20.
The Natural Resources Ministry will decide what sanctions to impose on the Sakhalin-2 project operator after completing an environmental review of the project this month, minister Yury Trutnev, said Oct. 20. He will visit Sakhalin Island on Oct. 25.
Russia’s demand that oil and gas companies obey environmental regulations reflect the same concerns as U.S. congressional moves to ban drilling in Alaska, Putin said. Companies are hiding behind “scandals” over budgets and environmental checks while “defending their own commercial interests,” he said.
Shell owns 55 percent of Sakhalin-2, while Japan’s two largest trading companies, Mitsui & Co. and Mitsubishi Corp., hold the other 45 percent.
Shell’s costs for the venture will rise to $28 billion (14.9 billion pounds) from $15 billion predicted in 2003, the Observer reported today, citing a report from the mineral services unit of Russia’s Natural Resources Ministry.
The plant off the east coast of Russia has doubled its construction budget of $20 billion and there is a “strong possibility” that costs could rise further, the paper said.
OAO Gazprom may be close to a deal where it would gain a 25 percent stake in the Sakhalin plant, which would reduce Shell’s majority stake, the paper said, citing “Russian sources.”
Alexandra Wright, a spokeswoman for Shell in London, declined to comment on the article.
Ivan Chernyakhovsky, a spokesman for the project, Sakhalin Energy Investment Co., said he couldn’t speculate on the $28 billion figure. He said, the first phase cost $2 billion, and expenses for the second, current phase are $20 billion 2014.
The second phase is 80 percent complete, he said, leaving little room for speculation about further cost increases.
To contact the reporter on this story: Torrey Clark in Moscow at email@example.com .