Royal Dutch Shell plc .com Rotating Header Image

How Chris Finlayson bungled the Mother of all Projects: Sakhalin II

Chris Finlayson representing Shell and Alexander Medvedev, Gazprom’s Vice Chairman

By John Donovan

Chris Finlayson, the newly appointed Chief Executive of BG Group, held a leadership position in Shell’s Sakhalin II project in Russia from September 2005 to September 2009. The venture was described as “the Mother of all Projects” by the Financial Times.

We have already published an article about his involvement in the Royal Dutch Shell reserves scandal, providing evidence – in the form of authentic Shell internal documents – supporting my conclusion that he was either part of the cover-up, or negligent in his fiduciary duties as a senior Shell executive to protect the interests of investors.

When Finlayson joined the Sakhalin II project, Shell was the controlling stakeholder in the venture. By the time he departed, Shell had lost its controlling stake and become a junior partner in humiliating circumstances. The Putin regime found out that Shell had hidden information from them in a high level cover-up. Finlayson played the key role in the negotiations with Gazprom that went disastrously wrong for Shell.

Finlayson lamely tried to explain to the host government why projected budget costs had doubled. Progress had also been hit by production delays. He made promises that were not met, demands which backfired, and eventually lost the battle over control of the project. Not an inspiring record and totally at variance with the current boasting in a BG Group press release about the role of Finlayson in “managing” Gazproms entry into the Sakhalin II project as a joint venture partner. It was actually a case of mismanagement ending in abject surrender and humiliation. There was further embarrassment and a drop in the value of Shell ‘A’ shares when what was meant to be a secret protocol covering a $3.6bn additional cost to the original partners, was leaked by the Russians. (1) (2) (3) (4) (5)

When Finlayson commenced the negotiations as Chairman of Sakhalin Energy, Royal Dutch Shell had a 55% stake as the operator. Japan’s Mitsui & Co Ltd had a 25% stake, and Mitsubishi Corp 20%. At a result of Shell’s surrender, Gazprom acquired a controlling stake in the project in December 2006. The stakes of the original partners, Royal Dutch Shell, Mitsui and Mitsubishi, halved to 27.5%, 12.5% and 10% respectively. In short, Shell lost control and became a minority partner. The Russians had acquired a majority stake at a bargain price.

CHRIS FINLAYSON CONFIDENTIAL INTELLIGENCE BRIEFING TO THE U.S. GOVERNMENT

WikiLeaks provides us with an account of what actually happened in December 2006. It comes mainly from Chris Finlayson himself in a briefing he gave to the then U.S. ambassador in Moscow on 14 December.

Shell’s negotiations with Gazprom (controlled by the Putin regime) were deemed important enough to be the sole subject of a classified confidential cable sent in December 2006 by the U.S. Embassy in Moscow to senior people at multiple U.S. government destinations, including the U.S. National Security Council and U.S. Departments of Defense, Energy, and Commerce. One recipient for example, was Tracy McKibben, Senior Director for European Affairs at the National Security Council. No doubt the Americans were concerned about potential ramifications for the ExxonMobil Sakhalin I project.

The subject heading of the confidential cable was “RUSSIAN ENERGY: AMBASSADOR MEETS WITH SHELL ON SAKHALIN-2″

Extracts

Finlayson said that up until December 13 the negotiations regarding Gazprom’s entry into Sakhalin-2 project had been progressing well

At a meeting on December 13, Alexander Medvedev, Gazprom’s Vice Chairman and negotiator on the Sakhalin-2 project, informed Finlayson that Gazprom’s Chairman Alexey Miller had examined the file on the environmental accusations made against SE by Oleg Mitvol, deputy head of the Ministry of Natural Resources’ environmental watchdog agency, Rosprirodnadzor. Miller concluded that the environmental damages — $10 billion worth — should be factored into the negotiations. As a result, Medvedev said that Gazprom was willing to offer only $2.6 billion for the 50 percent stake. Finlayson said this was a “silly” offer significantly below earlier offers and that it was not within his remit to even discuss such a low figure. These comments track with what the Ambassador was told by the U.K. Ambassador Anthony Brenton (please protect), who said that press coverage of the negotiations did not accurately reflect the difficulties the two sides were having coming to closure.

In a separate conversation with the Ambassador, Japanese Ambassador to Russia Yasuo Saito (please protect) said that there is a good chance that the Japanese companies, by contrast with Shell, would cave-in to Gazprom’s demands because they are under a lot of pressure in Japan to deliver the gas. Finlayson said that there “very likely” will be further production delays as a result of these negotiations and the recent removal of water use licenses on some stretches of the gas pipeline on Sakhalin Island and affecting drilling permits.

Finlayson said that it was hard to tell where this issue would go from here and how much of this was negotiating bluff on the part of Gazprom.

Cable Extracts End

CONTRARY TO THE FINLAYSON BLUSTER, SHELL CAVES IN

As is evident from his account, the whole negotiating situation changed when out-of-the-blue, Medvedev raised the subject of a file of “accusations” supplied to him by a Russian Environmental Minister, Oleg Mitvol. This was the pivotal card played by the Russians at that late stage in the negotiations, not the doubling in project costs.

Finlayson claimed in March 2006 that Shell had sent “truckloads” of documents to the Russian agency investigating the cost overrun…” Unless they fell off in transit, Shell neglected to supply the documents in the Mitvol file, which were not accusations, but incriminating authentic Shell/SEIC internal documents and communications. Information later described by the Senior Correspondent of The Petroleum Economist, after he had scrutinized the documents, as “detailed material about Shell’s ecological abuses on Sakhalin: a catalogue of corner-cutting, mismanagement and efforts to cover up damaging evidence.”

Shell’s negotiating position and integrity was severely damaged.  Contrary to the Finlayson bluster, Shell caved in to the alleged bluffing by Gazprom. It had been forced on the back foot by the evidence in the file and within days endured a humiliating capitulation with a consequential dramatic impact on Shell. (1) (2) (3) (4) (5)

The New York Times reported on the extraordinary outcome: Energy giants cede Putin control with a thank you

First two paragraphs

INSIDE the Kremlin last week, the executives of three big international companies – Royal Dutch Shell, Mitsubishi and Mitsui – heaped praise on the man whose government had forced them to cede control of the world’s largest combined oil and natural gas project.

“Thank you very much for your support,” Shell’s chief executive, Jeroen van der Veer, told the President, Vladimir Putin. The meeting ended a six-month regulatory assault on the project, Sakhalin II, but only after the companies surrendered control of it to the state energy giant, Gazprom.

As I pointed out at the time, Shell’s sycophantic praising of Putin was analogous to the victim of a prolonged ruthless assault thanking the mugger who had coshed him senseless and stolen his valuables.

Finlayson had said only weeks earlier that “Shell was “very much looking forward to welcoming Gazprom to the project as a leading shareholder…“. Due to this astonishing turn of events, Gazprom had taken control, with Shell relegated to minority status. Gazprom had expected to make $50bn from Sakhalin II. Now it would make double that and much more, all at the expense of Shell and the other original partners.

WHERE DID THE DEVASTATING EVIDENCE COME FROM?

Mitvol confirmed in news media interviews at the time (1) (2) that I was the person who supplied him with the damaging evidence (Shell internal documents) proving that Shell/Sakhalin II senior management had not disclosed internal warnings about environmental violations.

EXTRACT FROM ARGUS FSU Energy

INTERVIEW WITH OLEG MITVOL

Q: Who will take Sakhalin Energy to court?

A: I will take them. I have documents proving that the Sakhalin Energy management was aware that the company violated technical standards, but carried on trying to meet project deadlines and refused to stop work. I am confident of winning my case in Stockholm.

Q: What documents are these? Where are they from?

A: 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.

Q: How could you prove that these documents are genuine?

A: 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.

Mitvol confirmed again in a TV documentary feature aired across Europe and North America earlier this year that I was the source of the evidence in his file. The Russian government previously had suspicions, but no evidence.

I had regularly passed Shell/Sakhalin II insider documents to Oleg Mitvol until literally days before the crucial meeting between Finlayson and Alexander Medvedev.

PLEDGES OF TRANSPARENCY MADE BY CHRIS FINLAYSON

The withholding from the host government of materially important information (the cover-up) was directly at odds with pledges of transparency made by Finlayson.

(Extract from “Shell’s activity barbaric, says Russia”: Gulf Times 29 September 2006)

Asked about Shell’s environmental record, the company’s top executive in Russia told Reuters Sakhalin-2 was a “world class project with a unique degree of transparency”. “We have nothing to hide and nothing to be ashamed of on Sakhalin,” Chris Finlayson, president of Shell Exploration and Production Russia, said.

It is also impossible to reconcile his pledge of transparency with the content of the following articles, all concerning events that took place while Finlayson was in the leadership position at Sakhalin Energy.

The Observer: Shell comes under fire for role in Sakhalin audit: 31 August 2008
BusinessGreen.com: Shell accused of manipulating environmental report: 1 September 2008
Environmental Leader: Shell Criticized for Manipulating Environmental Audit Report: 2 September 2008

in 2008, the WWF supplied Sakhalin II related evidence to a House of Commons Select Committee. It included reference to the insider information leaked to me including Sakhalin-2 whistleblower warnings which proved 100% correct.

THE MAN WHO BROUGHT SAKHALIN TO A HEAD

On 12 December 2006, I received an email from Derek Brower, Senior Correspondent (and now editor-at-large) of The Petroleum Economist magazine. Derek asked:

“I was wondering if you’d be available to do an interview at some point. We’re curious to find out about the man who brought Sakhalin to a head!”

See subsequent article published in Prospect Magazine: How two men and a website in Colchester humbled one of the oil industry giants

Extract

What most astonished Shell was the detailed inside knowledge Mitvol had accumulated about the company’s abuses. Some in the company suspected industrial espionage. But it was actually information that the Donovans of Colchester were passing to Mitvol. The two men had received detailed material about Shell’s ecological abuses on Sakhalin: a catalogue of corner-cutting, mismanagement and efforts to cover up damaging evidence. They say they got this information from Shell insiders. Mitvol clearly trusted the material, and in December he admitted for the first time publicly that his deep throat on Sakhalin was John Donovan.

EVIDENCE OF SHELL’S INTENT TO KILL A RELATED SUNDAY TIMES ARTICLE

Our involvement in these seismic events via contact with The Kremlin, Mitvols office and a Rosprirodnadzor agent in London, also attracted the attention of The Sunday Times who decided to publish a story about our battles with Shell and our involvement in the Sakhalin II project. Their reporter Steven Swinford interviewed me and Oleg Mitvol who, as usual, was forthright in his comments about Shell. Swinford read the half page article over to me at 11am on 3rd February 2007. It was to be printed that afternoon for publication the next morning. It described our involvement in the Sakhalin-2 project as “The Ultimate Revenge” and said that our intervention had cost Shell £11 billion. Bloomberg had already estimated a 4 percent reduction in Shell’s oil and gas reserves as a consequence of the Sakhalin debacle. The Sunday Times article contained quotes from Swinford’s interview with Oleg Mitvol, including Mitvol expressing his surprise at the lack of a fight put up by Shell and their meek surrender of control.

Without any credible explanation, the article was not published the following day and was never published.

We were left baffled until we decided to seek Shell internal documents about us by making a SAR application to Shell under the UK Data Protection Act. When we received the internal Shell communications about us, we discovered that Shell had been very closely monitoring our activities. Most surprising of all, a Shell internal communication dated 2 February 2007 revealed Shell’s wish to kill The Sunday Times story by trying to persuade The Sunday Times that it was “old news”. They actually used the term: “kill the story.”

Shell’s continued concern was evident from a further internal email the following day, 3 February. By coincidence or otherwise, the article was killed that very day. A short time later, The Sunday Times published a spectacular colour advertorial promoting the Shell Ferrari partnership.

The Sunday Times did publish a half page article about us by Danny Fortson in July 2009, naturally noticed by Shell, which made passing reference to the billions in lost revenues to Shell arising from our Sakhalin intervention. Other articles, including a half page in The Guardian, made the same point.

THE FINANCIAL IMPACT ON SHELL ARISING FROM THE SAKHALIN DEBACLE

The £11bn calculation was made by The Sunday Times after checking financial information published by Shell. The losses subsequently became even clearer.

In the RDS Annual Report 2007, Shell declared: “The main impact on the Consolidated Balance Sheet was a decrease of $15.7 billion in property, plant and equipment and $6.7 billion in minority interest…” This was partly offset by an increase of $3.7 billion under equity accounted investments. This means there was a loss of over $18 billion under those headings alone.

Extract from Royal Dutch Shell Annual Report and Form 20-F 2007 – 28 Minority interest

“In April 2007, Shell sold half of its interest in Sakhalin II, reducing its interest from 55% to 27.5%, for a sales price of $4.1 billion. As a result of this transaction, Sakhalin II has been accounted for as an associated company rather than as a subsidiary with effect from April 2007. The main impact on the Consolidated Balance Sheet was a decrease of $15.7 billion in property, plant and equipment and $6.7 billion in minority interest, and an increase in investments: equity-accounted investments of $3.7 billion.”

The Boston Globe estimated in an article published on 23 August 2008 that Shell had lost up to $9.6bn from the downsizing of its share in the project.

We then have to add the reduction of proven reserves. Shell admitted in the same Annual Report (2007) a loss of “402 million boe of proven reserves” arising from the same transaction.

Extract from Royal Dutch Shell Plc Annual Report and Form 20-F 2007 – Reserves

An article published in The Observer newspaper on 16 March 2008 estimated the loss was actually 1.1 billion boe. At $100 per barrel, colossal sums are generated whichever figure for lost “proven reserves” is used in the calculation.

Suffice it to say that Shell lost many tens of billions of dollars as a result of information we passed to the Russians from Shell/SEIC insiders during the period when Chris Finlayson was responsible for the corrupt shambolic Sakhalin II project in Russia.

GENERAL DAVID GREER

Our unusual involvement in the Sakhalin project continued.

In June 2007, an insider supplied me with an extraordinary motivational message with a military tone circulated to Sakhalin II workers by the Deputy Chairman/Project Director of Sakhalin Energy, Mr. David Greer. It resulted in the resignation of Greer after I passed it to the Financial Times, triggering several articles and an FT Poll, when it became apparent that the most inspiring part of the memo had been plagiarized from a war time speech by General George Patton.

Extracts from the FT article ‘Pipeliners All!’ Shell’s memo to Sakhalin (See link to full article below)

In a leaked email from David Greer, the deputy chief executive of Sakhalin Energy Investment Company, the consortium running the Sakhalin 2 project, he reveals that he despises cowards and urges his staff to “Lead me, follow me, or get out of my way”.

After the good news, though, the mood darkens. “However, some of the comments and body language witnessed at the Bi-annual Challenge meeting do suggest that PDP is running the risk of becoming a team that doesn’t want to fight and lacks confidence in its own ability. Surely, this is not the case?”

Personally, I, like most others, love winning. I despise cowards and play to win all of the time. This is what I expect of each and everyone of you…”

It was clear from the content of the email that the workforce under the leadership of Chris Finlayson and his subordinate, David Greer, was thoroughly demoralized.

‘Pipeliners All! Shell’s memo to Sakhalin
Shell’s team in ‘hell’ feels the heat
Shell man’s motivational memo is straight from the Patton script
Motivational memos must make their message clear
Memo writer in the Shell annals
FT Online Poll on “Worst Motivational Memo”

ACCUSATIONS OF PERSONAL THREATS TO OUR INSIDER SOURCES

In July 2007, we received an allegation from a former Sakahalin II worker naming “Craig, Ruddock and Finlayson”.

Extract

“I can confirm the views of Simon and Lucio. I was kicked out of SEIC and have since been the victim of uninterrupted personal threats and attacks by Craig, Ruddock and Finlayson’s police in an attempt to silence me from telling you the whole truth about Sakhalin 2 budget and schedule. It is only the fear of losing my freedom and livelihood that prevents me from telling you more”.

One of our prime Sakhalin insider sources cut off the flow of information because of threats being made. There was a climate of fear.

Since then, Irish Police have investigated death threats made against our insider sources working on the Corrib Gas Project.

SHELL TAKES COVERT RETALIATORY ACTION AGAINST OUR WEBSITE

In June 2007, Shell had secretly threatened legal proceedings against our website server hosting companies in Canada and the USA. The threats resulted in the website being deactivated on 25 June 2007. Although initially unwilling to disclose who had made the threats, each hosting company reluctantly confirmed that it was Shell. Keith Ruddock, the Royal Dutch Shell General Counsel involved in the Sakhalin II project – the “Ruddock” mentioned in the insider allegations, later confirmed in an email to me dated 26 June 2007, that Shell was responsible for the machinations which briefly shut down the website.

Unbeknown to us at the time, this was part of an internal decision to put Shell on a war footing in its dealings with us.

CHRIS FINLAYSON DEFENDS SHELL’S “TOUCH FUCK ALL” EMPLOYEE SAFETY CULTURE

More about the sinister activities of Shell will be revealed in our next article about Mr Finlayson.

Draft title: Chris Finlayson’s defence of Shell’s TOUCH FUCK ALL approach to oil rig maintenance (in his own words)

BACKGROUND INFORMATION THAT DOES NOT INVOLVE CHRIS FINLAYSON

Soon after the Sakhalin II affair came to a head, Shell set up a counter-measures team, sought advice from a specialist cybercrimes unit in Pittsburgh founded, staffed and partly funded by the FBI and set up a global spying operation tasked with trying to identify our sources. A senior Shell spook became one of our sources and supplied confidential Shell documents about Shell Global Security. We have published some of the information. 

Because of our reputation for insider information about Shell, I was subsequently approached by the U.S. government in relation to an investigation of Shell activities in the USA. At their request, I supplied leaked Shell internal documents and communications . The U.S. government in turn supplied us with information about alleged corporate espionage carried out by Shell in relation to intellectual property. I also met in London with an individual publicly identified as being linked to the CIA and the FBI. I supplied detailed information about our activities. I have email correspondence confirming all of this.

On 12 November 2012, Mr. Michiel Brandjes, Company Secretary & General Counsel Corporate, Royal Dutch Shell Plc sent me an email denying that Shell has any involvement in or knowledge of the long term cyber attacks made on our website, which we recently reported to the UK Police.

OUR UNUSUAL ASSOCIATION WITH SAKHALIN II CONTINUES TO THIS DAY

A hostile party has made veiled threats against us, and regularly circulates to the Russian government, senior management at Gazprom, Shell (Peter Voser), Sakhalin Energy, ExxonMobil (Sakhalin I), news agencies and the UK Police, emails about our activities. The most recent was sent on 21 December 2012. It drew attention to a teaser announcement I posted about this pending article on 20 December.

Comments are closed.

%d bloggers like this: