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Shell chief keeps faith in ‘elephant’ projects

Financial Times: Shell chief keeps faith in ‘elephant’ projects

By Thomas Catan in London

Published: July 16 2005

Jeroen van der Veer, Royal Dutch/Shell’s chief executive, yesterday said the $10bn cost overrun on its flagship Russian gas project represented a further blow to the energy giant’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 in an interview with the Financial Times.

However, he said the company was acting to improve its project management and pointed to large developments that he said were progressing smoothly.

“The present reality is that we do some projects very well, and this large Sakhalin project and some others we don’t do that very well,” he said.

On Thursday, Shell disclosed it had received an assessment that the project, of which it is 55 per cent owner, was running 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 company, leading to a management purge, a shake-up of its century-old corporate structure and about $240m in legal payments.

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

Mr Van der Veer said that the dramatic 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 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.”

The news has also sparked worries that other Shell projects could have been assessed too optimistically. “That is exactly the question we ask ourselves as well,” Mr Van der Veer said.

Shell is reviewing all its projects to determine if it will have to revise upward its capital expenditure budget for 2006 and beyond. The company is also setting up a “project management academy” to improve the way it handles large projects.

But it would not shy away from them because of difficulties, Mr Van der Veer said. The company is currently working on three multi-billion dollar “elephant” projects, including Sakhalin-2. Mr Van der Veer has said he would like the company to have 10 such projects on the go at any one time in the future.

“I am absolutely confident that the place for Shell in the future is to do those very large mammoth or elephant projects,” he said. “That’s where Shell can add value and if we do a good job of course [we] can make good income.”

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