ShellNews.net: The inside story of Shell’s Sakhalin II debacle

By Alfred Donovan

Introduction

Published below is a statement received from Mr Keith Ruddock, General Counsel Exploration and Production, Shell International B.V. It relates to the article herein: “The insider story of Shell’s Sakhalin II debacle”. 

The email correspondence with Shell on this matter commenced with Shell International Petroleum Company General Counsel, Richard Wiseman, on 30 December 2006. 

We subsequently issued the following invitation: -

“The offer is to let Shell have advance sight of the comprehensive article currently being drafted with the active involvement of senior Shell/Sakhalin insiders. We would carefully consider any comments made by Shell and, as always, would happily publish with the article, on an unedited basis, any comments/rebuttal made by Shell in response to the revelations and allegations contained in the article. If you needed a few days to discuss matters with the persons named in the article before responding, that would not be a problem.” 

Shell accepted the offer on 1 January 2007 and on 5 January supplied their response, which as promised, we have published unedited.  Consequently, Shell had the opportunity to issue an injunction to prevent publication on the grounds that the allegations made in the article are unfounded. It chose not to do so.

The response from Shell…

05 January 2007

Dear Mr Donovan

We disagree fundamentally with the factual basis and interpretation of much of the material you have produced but believe that no useful purpose would be achieved by engaging in a detailed rebuttal.

Regards
Keith Ruddock
General Counsel Exploration and Production
Shell International B.V.

The Article: The inside story of Shell’s Sakhalin II debacle

The Sakhalin II project in Russia is the world’s largest combined oil and natural gas project.  It is being developed by Sakhalin Energy, a company in which Shell was the majority shareholder. 

Shortly before Christmas, following a long campaign by the Russian government prominently reported in the global business news media, Shell surrendered its majority holding and became a minority shareholder along with the other founding partners, Mitsui and Mitsubishi. Like Shell, each sold 50% of their holding to Gazprom at less than market value. 

A few days later, the Russian government leaked the news that the founding partners had entered into what was supposed to have been a secret protocol with Gazprom which made the proposed deal even more of a multibillion dollar humiliation for Shell and the Japanese companies.

Under the provisionally agreed terms, Shell ends up as a junior partner in a state run project controlled by a ruthless Russian government led by the former KGB Colonel, President Putin. He has been personally involved since his public roasting of Royal Dutch Shell CEO Jeroen van der Veer (during a state visit to The Netherlands in November 2005) over the proposed doubling of the project budget to $20 billion.

http://www.shellnews.net/week44/reutersputin2november2005.htm

Shell executives had pretended that they knew nothing about the huge project budget increase when agreeing a swap deal in principle with Gazprom earlier in the year. A matter of days later Shell sprung the astonishing news on Gazprom that the Sakhalin II budget had increased by $10 BILLION. It was a breathtaking blunder to try to pull a fast one on the Russians who are the recognised grandmasters in game strategy.

http://www.shellnews.net/week28/shellnewssakhalin2debacle.htm

Shell will now have to be satisfied with whatever crumbs are thrown in its direction. Even more worrying to Shell, despite the inking of the provisional deal, the final terms are still being negotiated, so the revelations of deception and cover-up in this article may provide more ammunition for Putin to punish Shell management for its mendacity and incompetence.

Putin attended the signing ceremony in Moscow at which Shell CEO, Jeroen van der Veer, bizarrely thanked him for his support. Bearing in mind the allegations made by US Vice President Cheney that Russia is using energy as “an instrument of intimidation and blackmail”, the humiliatingly submissive stance adopted by Van der Veer would appear analogous to a mugger’s victim expressing thanks for being coshed and robbed.

Perhaps the entirely unsubstantiated allegations that Putin was responsible for ordering the murder of prominent opponents during the period in which the Sakhalin II deal has been negotiated, rattled Mr Van der Veer somewhat. It was not an ideal backdrop, as far as Shell was concerned, for negotiations already being conducted in a tense atmosphere, with world leaders making their objections known about the hardball tactics allegedly being used against Sakhalin Energy. 

Our Role

A threatened claim against Sakhalin Energy for $30 billion by the Russian environmental agency, Rosprirodnadzor, plus the possibility of criminal proceedings, rests on evidence we supplied to its deputy head, Oleg Mitvol, the now notorious so called “Kremlin attack dog”. There are grounds to suggest that Mitvol works directly for Putin.

My son John and I jointly own and operate a website under the domain name of royaldutchshellplc.com: the dotcom domain name for Royal Dutch Shell Plc.  It has been described by Mitvol as an “anti-Shell” website.  Mr Mitvol has publicly acknowledged our significant role in the momentous events which have unfolded. The reasons for our opposition to the current Shell management are set out below in the section entitled “Background Information”.

Our website, with its “Live Chat” facility, has effectively replaced the Tell Shell Forum on Shell’s own portal website as a venue for Shell employees to discuss concerns with other Shell employees on an anonymous basis if they wish.  “Tell Shell” was “suspended” over a year ago after Shell General Counsel Richard Wiseman admitted to me in an email that contrary to claims previously made by Shell management, including John Hofmeister, of a  censorship free forum for open and lively debate, postings had in fact been secretly censored.

As a result of our website activities, we have been contacted by numerous Shell “insiders”, some of whom have revealed scandalous conduct by Shell executives. One example is the Brent Bravo scandal in which Shell received a record breaking fine for Health and Safety violations as a result of the tragic but preventable deaths of Shell North Sea workers. According to Shell International Group Auditor, Bill Campbell (now retired), Shell Executive, Malcolm Brinded, was involved in a related cover-up.

http://royaldutchshellplc.com/2006/08/09/shellnewsnet-when-is-shell-going-to-sue-former-shell-international-group-auditor-bill-campbell-for-defamation/

As a result of contact made by insiders working on Sakhalin II, it soon became apparent that things were also going badly amiss on what Jeroen van der Veer has always described as “an elephant project”.  He may now agree with the modified description we have regularly applied: a white elephant project.

Leaked Shell internal documents have regularly fallen into our hands. This included email correspondence about Sakhalin II between two senior Shell managers, Engel van Spronsen, in his then capacity as Technical Director of Sakhalin Energy, and Hans Bouman, a natural-gas field manager; both are now retired. 
 
http://royaldutchshellplc.com/2006/10/23/shellnewsnet-the-hans-bouman-engel-van-spronsen-sakhalin-emails/

We are in the fortunate position of having access to Shell insiders who can provide us with expert analysis of information supplied and did so in respect of the above extraordinary email correspondence.

Concern was expressed in the emails, that the design for oil and gas wells on Russia’s Sakhalin Island does not properly address seismic risks.  After studying the relevant emails, the relevant Shell insider, who is calm and cautious by nature, warned us of a potential environmental calamity on a scale never before witnessed by humanity (our description).

A quote from the Shell insider warning: -

“You have no idea how significant the comments in those emails might be - to a petroleum engineer, they conjure up the worst of possible scenarios - uncontrollable blowouts in a frozen, pristine, ecologically sensitive environment, and the potential for the entire contents of the Sakhalin oil and gas fields to be released at the seabed. The Exxon Valdez would, quite literally, be a drop in the ocean by comparison.”

The warning went on to link Sakhalin II issues with the Shell reserves fraud in 2004.

We passed on these misgivings about the Sakhalin II project directly to President Putin in November 2005.

http://www.shellnews.net/week46/shellnewsputinwarning25november2005.htm

We later sent information to Oleg Mitvol and subsequently obtained his private fax number from his secretary to get information directly on to his desk. However, since we had never succeeded in speaking to Mitvol, we had no idea whether any of the information we had passed on from Shell insiders had been of any interest. The first clue that our activities had been noticed was when a message from “The Ministry of Natural Resources of The Russian Federation” was posted on our “Live Chat” forum in October 2006:

http://royaldutchshellplc.com/2006/10/06/shellnewsnet-did-our-whistleblower-email-to-oleg-mitvol-precipitate-the-sakhalin-ii-crisis/

We were subsequently surprised to read an article in a petroleum magazine which contained a question and answer interview with Oleg Mitvol. He indicated that his threatened $10 billion claim against Shell for alleged environmental damage (later upped to $30 billion) rested on evidence supplied by my son. The following is an extract:

What documents are these? Where are they from?

Mitvol: “I have email correspondence between executives in Sakhalin Energy management from 2002. I received these letters from John Donovan, owner of the anti-Shell website www.royaldutchshellplc.com. I received them on 19 October and forwarded them to Sakhalin Energy with a request for an official reply. But I have not received any reply so far. I presume that they are in shock.”

How could you prove that these documents are genuine?

Mitvol: “They appear genuine and we have special services working to prove this. Once they have been verified, we will have enough evidence to take Sakhalin Energy to court. If we win, the Sakhalin 2 consortium should pay compensation for all the environmental damages — which will come to over $10bn — as well as compensation to the state for loss of revenues caused by the additional delays.”

Link to full article:

http://royaldutchshellplc.com/2006/11/19/argus-eyescom-mitvol-turns-up-the-heat-i-received-these-letters-from-john-donovan-owner-of-the-anti-shell-website-wwwroyaldutchshellplccom/

Further confirmation was contained in an Interfax news agency report published by “Johnson’s Russia List”

“On October 19, Rosprirodnadzor deputy chief Oleg Mitvol sent a letter to Sakhalin Energy CEO Ian Craig, asking him either to confirm or deny information contained in confidential e-mails from Shell natural gas field manager Hans Bouman to Engel Van Spronsen, then Sakhalin Energy technical director in 2002. Copies of the e-mails were forwarded to Rosprirodnadzor from John Donovan, a Shell shareholder and the owner of a website providing news on Shell.”

http://www.cdi.org/russia/johnson/2006-256-22.cfm

We are now in direct correspondence with Mark Stephens, a senior partner in the London law firm Finers Stephens Innocent, appointed by the Russian authorities in relation to the Sakhalin II project. We will shortly be supplying Mr Stephens with highly sensitive confidential information received from Shell insiders which may well provide additional grounds for the Russian authorities to further punish Shell. The information we are receiving is truly astonishing.

As we have previously acknowledged, we have no illusions about the Sakhalin II high-stakes poker game which has been in progress. We have supplied information and Shell internal documents in the probably forlorn hope that some good will come of it in terms of the environment and in particular the endangered Gray Whale population.  From recent comments attributed to Putin, it seems as if the environmental issues may indeed be swept to one side. We also wanted to expose the continuing hypocrisy of a Shell management which claims to work within an ethical code pledging honesty, integrity and openness in all of its dealings.  The reality of corruption, fraud, cover-up, intimidation of employees and admitted use of undercover agents, confirms that the ethical code is purely for PR purposes as per the multi-million dollar “Profits & Principles” global campaign.  It should have been “Profits & No Principles”.

Spying activity

Oleg Mitvol has confirmed that he called in Russian “special services” to check on the authenticity of the leaked Spronsen/Bouman emails. This probably explains the Lloyds List news story:

http://royaldutchshellplc.com/2006/11/30/lloyds-list-i-spy-with-my-little-russian-secret-services-infiltrating-sakhalin-energy/

According to reports received from Shell insiders, Shell “spooks” have also been engaged in a hunt to track down the sources of leaks documents and information. 

Shell in alliance with distasteful regimes

It is ironic that Shell is now in bed with what many people rightly or wrongly consider to be a very distasteful Russian government.  In any event, this is unlikely to concern Shell management as it has worked alongside corrupt Nigerian regimes for decades in plundering Nigerian national resources (and polluting the environment to a horrific extent). Time will tell whether President Putin has acted in the Russian national interest or for other motives.

Shell Nigerian Corruption:

http://www.shellnews.net/2004%20Documents/peaceandsecurity/peaceandsecurityinthenigerdeltawebpage.htm

Sakhalin II corruption:

http://www.shellnews.net/WEEK%202%202006/shellnewsnet-bribery-and-corruption-at-shell-14-january-2006.htm

Inside the Evil Empire:

A Shell insider who worked on the Sakhalin project has recently shared some insights with us about the mechanics of how Shell got the project costs so massively wrong.  To protect anonymity some information has been changed without affecting the accuracy of the basic revelations made about the project.

From what we have learned, the company’s senior managers - both locally in Sakhalin and elsewhere - were aware of cost overruns far earlier than they have yet admitted and actively tried to suppress the true costs becoming common knowledge, even threatening employees to preserve the vow of omerta inside the project.

The individual concerned is a long serving Shell manager who was working in a project role in Sakhalin and had regular access to monthly cost reports. He was recruited for the Sakhalin project based on his previous experiences with other Shell developments, but rapidly found that this project was run along very different lines. Although he left the project towards the end of last year he still retains contact with other Expat and Russian national staff.

Specific allegations include:

From mid 2003 (when he first arrived on the island) the cost increases were common knowledge amongst the Expat community - Shell management has consistently claimed that they only became aware of this later. In fact when David Greer joined the project he immediately instigated a cost review, thinking that he could rapidly raise project costs and leave the blame with Steve McVeigh. He could then deliver for slightly less and justify a sizeable bonus for himself. Amusingly, Shell’s management is so incompetent they can’t even fudge numbers effectively!

The contingency for the project was absolutely minimal 5% - the official explanation for this was that they could afford a low contingency because the likelihood of problems was easily managed by the expertise of the management team. In practice, industry norms for a project of this nature would be around 12.5% - 15% and often as high as 20% to reflect potential problems with operating in Russia with uncertainty over the cost of materials such as steel and delays due to extreme weather conditions. Additionally, for the early part of the project there was no effort made to hedge against losses on currency exchange, leading to significant avoidable cost increases, although there was very significant risk present and recognisable since much of the project contracts were based on US$ pricing and many materials - i.e. steel - are in high demand on the world market and thus command a premium.

Shell clearly had not learned from their problems with the Kashagan project where they made the same mistakes, and ended up shifting the blame on Togrul Tosun, one of the senior managers in charge. In the late 1990s he was already predicting sizeable cost overruns for the Sakhalin project as he was convinced that Shell’s controls were totally inadequate for the situation they found themselves in. His reward was to carry the blame for Kashagan (one of Shell’s earlier disastrous Rus