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Shell failed to disclose spiralling costs in merger prospectus

THE TIMES: Shell failed to disclose spiralling costs in merger prospectus

SHELL failed to disclose in its merger prospectus the massive cost overruns at Sakhalin II, the Siberian gas project whose budget has doubled to $20 billion (£11.5 billion).

Thursday 21 July 2005

By Carl Mortished

SHELL failed to disclose in its merger prospectus the massive cost overruns at Sakhalin II, the Siberian gas project whose budget has doubled to $20 billion (£11.5 billion).

A Stock Exchange document published in late May lists Sakhalin as the largest Shell investment but gives no indication of the scale of the cost and scheduling troubles that have plagued the project since its launch in May 2003.

Last week Shell revealed that Sakhalin costs would be “of the order of $20 billion”. However, the listing particulars published on May 19 stated: “Overall investment in the Sakhalin II project is expected to be over $10 billion.”

Concern about cost and management issues at Shell depressed Royal Dutch Shell A shares, which slipped more than 3 per cent to 1766½p yesterday. Shell’s 55 per cent share of the Sakhalin cost overrun is equal to its first-quarter profit of $5.5 billion.

Listing particulars are published before the launch of new shares on the Stock Exchange. The Financial Services Authority would not comment on Shell’s listing particulars yesterday but said: “We expect figures to be accurate; that is the responsibility of the issuer.”

Jeroen van der Veer, Shell’s chief executive, said last Thursday that he had been made aware only the previous day of the new $20 billion cost figure for Sakhalin. Sources close to Shell indicate that an internal audit team was commissioned by Mr van der Veer late last year to investigate the mounting problems.

The ballooning costs were first reported as long ago as April last year, when The Times disclosed that the internal budget for the project had spiralled from $10 billion to $12 billion.

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