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Daily Telegraph: Shell admits cost of flagship Russian oilfield rises to £11bn

Daily Telegraph: Shell admits cost of flagship Russian oilfield rises to £11bn

“It is the second time in recent memory that the oil company has surprised its investors, after admitting last year that it had overstated its reserves by more than 40pc.”

Friday 15 July 2005

By Malcolm Moore (Filed: 15/07/2005)

Shell yesterday admitted that the cost of its flagship project on Sakhalin Island in Russia had doubled to about $20billion (£11.5billion).

Jeroen van der Veer, chief executive of the oil major, said that he had been told on Wednesday there were “further significant cost overruns” and that he felt announcement had to be made in line with the policy to be “fully transparent”.

Shell has faced protests from environmentalists

Shell insisted it had announced previously that the project was late and over budget, but the scale of the extra costs, amassed in the past two years, shocked analysts.

It is the second time in recent memory that the oil company has surprised its investors, after admitting last year that it had overstated its reserves by more than 40pc.

Malcolm Brinded, Shell’s head of exploration and production, blamed the scale, complexity and “frontier” location of the project for the extra costs.

The sea around Sakhalin is frozen for two-thirds of the year, and Shell has also faced a barrage of protests from environmentalists over the impact of its construction work.

The oil major recently decided to reroute an oil pipeline away from the feeding grounds of the endangered Pacific grey whale.

Mr Brinded also blamed external costs arising from Russian inflation, exchange rate swings, the higher cost of steel and commodities, and of hiring workers.

He said the new figures related to all costs until 2014, including drilling.

He said: “A number of the contractors will find it challenging in that they have moved from having incentives in place to working at cost to finish the project.”

Shell said it still believes Sakhalin, which is expected to yield one billion barrels of oil and 17trillion cubic feet of gas, is a “vital” and “worthwhile” project. It said the setback would have no effect on production or reserves for this year.

Mr Brinded commented that some of the cost overruns may be offset by higher oil and gas prices, which are rising in response to the scarcity of energy resources.

However, he declined to comment at what oil price the project would be economical, or whether Shell would have embarked upon it, had the oil major known about the scale of the costs upfront.

A spokesman for the oil company said its memorandum of understanding with Gazprom to swap a share in Sakhalin for another oil field, had not reached the stage where the exchangeable assets had been valued. Mr van der Veer said he had called Gazprom to tell them about the problems yesterday morning.

Jon Rigby, an oil analyst at UBS, who upgraded Shell yesterday morning, declined to comment over whether the bombshell would reverse his decision.

Shell shares rose 4¼p to 549p on the company’s anticipated restructuring.

( Posted here by John Donovan of http://royaldutchshellplc.com/ )

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