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Shell admits impact of Sakhalin-2 overruns

Financial Times: Shell admits impact of Sakhalin-2 overruns

“Jeroen van der Veer, Royal Dutch/Shell chief executive, admitted that the “absolutely staggering” $10bn (£5.7bn) cost overrun on Sakhalin-2, its flagship Russian gas project, was another blow to the group’s standing after last year’s reserves accounting scandal.”

Saturday 16 July 2005

By Thomas Catan

Published: July 16 2005

Jeroen van der Veer, Royal Dutch/Shell chief executive, admitted that the “absolutely staggering” $10bn (£5.7bn) cost overrun on Sakhalin-2, its flagship Russian gas project, was another blow to the group’s standing after last year’s reserves accounting scandal.

“I fully realise it has an impact on our reputation – certainly for this project, and then of course I’m concerned it will carry over to other things that we do,” Mr Van der Veer said yesterday in an interview with the Financial Times.

He said Shell was moving to improve its project management and pointed to big developments that he said were progressing smoothly. “We do some projects very well, and this large Sakhalin project and some others we don’t do very well,” he said.

Shell disclosed on Thursday that Sakhalin-2, of which it owns 55 per cent, was at least eight months behind schedule and would cost $20bn, twice the original estimate.

“We knew that there were cost challenges but this figure was absolutely staggering,” Mr Van der Veer said.

Shell has come through a difficult period after being forced to slash its oil and gas reserves five times last year. The scandal rocked the Anglo-Dutch company, leading to a management purge, a shake-up of its century-old corporate structure and about $240m in legal payments.

News that Shell’s prize project in Russia is so badly over-budget revived fears about whether its financial practices were too aggressive under the chairmanship of Sir Philip Watts, ousted last year after the reserves crisis.

Mr Van der Veer said the rise in the cost of Sakhalin-2 was partly due to industry-wide factors such as an increase in the cost of raw materials, more expensive contractors and exchange rate pressures.

But he also implied that the original assessment of the project in 2003 had been too optimistic and that its scope had to be subsequently revised.

“Scope changes are basically because you didn’t do enough homework in advance,” he said. “If you have a very marginal project, you would like to do a hell of a lot of homework, because otherwise you lose your shirt.”

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