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MosNews: Cost Overruns at Shell’s Sakhalin-2 Project Spell $10Bln Losses for Russia — Minister

Created: 13.09.2006 12:26 MSK (GMT +3), Updated: 12:26 MSK
 
Russia could lose $10 billion in the Sakhalin-2 oil and gas project if operators continue to raise expenditures, the country’s Natural Resources Minister Yuri Trutnev said on Tuesday, Sept. 12.

The Sakhalin-2 project, which is run by Sakhalin Energy and controlled by Royal Dutch/Shell, has had a history of controversy since its inception. In the latest challenge to its viability, development costs have reportedly doubled to about $20 billion as global commodity prices have risen.

“Operators’ plans to increase reimbursable costs are not acceptable to the Russian side,” Trutnev said, quoted by RIA Novosti. “We cannot avoid reacting. If these plans are implemented, the Russian Federation will lose some $10 billion.”

“The Russian Federation is obliged to protect its interests,” he said. “In no way does this situation mean a worsening of the investment climate in Russia.”

Trutnev’s comments came against the backdrop of a recent campaign launched by Russia’s environmental watchdog Rosprirodnadzor to suspend the Sakhalin-2 project. MosNews has reported last week that Rsoprirodnadzor filed a lawsuit seeking to overturn the conclusions of a state ecological probe into the project off the country’s Pacific coast, conducted in 2003. If a court upholds the service’s demands, all activity under the Sakhalin-2 project will be prohibited until the state ecological probe issues a revised conclusion and all environmental violations are eliminated.

The difficulties put in jeopardy contracts with Japan, South Korea and the United States on LNG supplies, which are due to go into effect in 2008.

Some analysts interpreted the environmental watchdog’s decision to be a form of pressure on the British-Dutch group to conclude a deal with Russia’s natural gas monopoly Gazprom. They said the Russian energy giant stands to gain a 25 percent plus one share in the Sakhalin project in return for a 50 percent stake in the massive West Siberian Zapolyarnoye-Neocomian project.

The Sakhalin-2 project comprises an oil field with associated gas, a natural gas field with associated condensate production, a pipeline, a liquefied natural gas plant and an LNG export terminal. The two fields hold reserves totaling 150 million metric tons of oil and 500 billion cubic meters of natural gas.

The Sakhalin Energy comprises Shell Sakhalin Holding (55 percent), Mitsui Sakhalin Development (25 percent) and Mitsubishi-controlled Diamond Gas Sakhalin (20 percent).

Earlier in the year, environmental concerns prompted the European Bank of Reconstruction and Development to withhold a loan for a pipeline.

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