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Globe and Mail ( Canada): Shell’s latest fiasco rooted in critical skills shortage

The humiliation of last week’s surprise confession seems almost cruel, a descent from the sublime to the ridiculous. Shell touted its excellence in project management only to be caught with its pants down. To make matters worse, the Shell chief had shared a platform only the previous week in London with Alexei Miller, the chairman of Gazprom. The two men agreed to a swap under which Gazprom would take a quarter of Sakhalin Energy, reducing Shell’s interest to 30 per cent and, in turn, give Shell a half share in Zapolyarnoye, a huge onshore gas field in Western Siberia. Astonishingly, Gazprom had not been told that costs had doubled because, the Shell chief said, he had not yet been made aware of the figures himself. Flummoxed analysts in the City wonder which is more bizarre: Shell’s failure to inform its new partner of the cost increase or the chief’s apparent ignorance of the numbers.

Globe and Mail ( Canada): Shell’s latest fiasco rooted in critical skills shortage

Posted Friday 22 July 2005

By CARL MORTISHED

Thursday, July 21, 2005 Page B12

LONDON — Royal Dutch Shell had its debut on the London Stock Exchange this week but trading in the shiny new merged shares was overshadowed by yet another management fiasco: the revelation that the cost of Shell’s biggest and most prestigious project, Sakhalin Energy, a Siberian liquefied gas facility, had doubled from $10-billion to $20-billion (U.S.).

It’s another blow to the company’s reputation, shredded in last year’s reserves scandal, but which had been on the mend with a concerted effort by Jeroen Van der Veer, the chief executive officer, to get Shell back to its roots of solid, no-nonsense engineering. Only weeks previously, the Dutch chief had assembled the international media in London for a cozy briefing in which he spelled out his vision. It was about skills, technological excellence and science. By 2010, the company would grow from three major infrastructure projects, multibillion-dollar schemes that he called elephants, to no less than 10 such projects.

The humiliation of last week’s surprise confession seems almost cruel, a descent from the sublime to the ridiculous. Shell touted its excellence in project management only to be caught with its pants down. To make matters worse, the Shell chief had shared a platform only the previous week in London with Alexei Miller, the chairman of Gazprom. The two men agreed to a swap under which Gazprom would take a quarter of Sakhalin Energy, reducing Shell’s interest to 30 per cent and, in turn, give Shell a half share in Zapolyarnoye, a huge onshore gas field in Western Siberia. Astonishingly, Gazprom had not been told that costs had doubled because, the Shell chief said, he had not yet been made aware of the figures himself.

Flummoxed analysts in the City wonder which is more bizarre: Shell’s failure to inform its new partner of the cost increase or the chief’s apparent ignorance of the numbers. Meanwhile, Gazprom is muttering about a rejigging of the asset swap. Shell can expect tough negotiations with the Kremlin over the new cost figures, which will significantly delay the arrival of tax revenue for the government.

Sakhalin Energy is about as big as it gets in the hydrocarbon business: two offshore production platforms in seas frozen half the year, an 800-kilometre pipeline and a liquefied natural gas plant, producing nine million tonnes of LNG for export to South Korea, Japan and the United States. Evidence of significant cost problems emerged in The Times in April last year and managers were replaced.

Shell points to soaring commodity prices: steel, cement as well as labour costs. The dollar has weakened against the ruble and the environment is posing big challenges, notably in the presence of a rare species of whale in the surrounding sea, requiring the rerouting of a submarine pipeline.

Inflation is an issue, but the real difficulty is probably more sensitive. It is a problem that is troubling every major energy company: people. To be precise, a shortage of people; a chronic lack of engineers, geophysicists, cost estimators and project managers. There is a critical shortage worldwide of the skilled professionals who can erect mammoth pieces of energy infrastructure to order, on time and keep them running like clockwork.

The world wants more oil and gas, and it wants it not tomorrow but yesterday. However, the industry is struggling to deliver. The costs of Statoil’s Snohvit LNG project in the Arctic have ballooned over the original budget. In the Gulf of Mexico, BP’s Thunder Horse platform tips mysteriously into the sea, although the company reports that a passing hurricane had not damaged the facility. In Scotland, the Lord Advocate has opened a fatal accident enquiry into two deaths on a North Sea platform, amid mounting concern about inadequate maintenance on rigs. In Texas, mistakes and poor supervision cost 15 lives in an explosion at a BP refinery.

The skills shortage is widely discussed on the fringes of the oil industry — universities and colleges report dramatic reductions in undergraduate intake for petroleum degrees — but few companies will admit to having a problem. If Shell’s chief was not kept properly informed of the Sakhalin cost explosion, you might expect to see a few heads rolling. Then again, he might decide that weak heads are better than none.

Carl Mortished is international business editor for The Times in London.

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