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MarketWatch: Shell manager warned of Sakhalin faults in e-mails

Last Update: 9:40 PM ET Oct 16, 2006
(This article was originally published Monday.)

LONDON (MarketWatch) — A Royal Dutch Shell (RDSB.LN) manager sent e-mails in 2002 expressing concern that the designs for oil and gas wells on Russia’s Sakhalin Island didn’t properly address seismic risks.

The e-mails from Hans Bouman, a natural-gas field manager, to Engel Van Spronsen, then Sakhalin Energy’s technical director, raise the possibility that the company’s risks at the Sakhalin II project go beyond the river bank erosion now under Russian government scrutiny.

In a May 29, 2002 e-mail, Bouman told Van Spronsen he had “started to worry” about potential flaws in the wells’ design after a technical presentation by Sakhalin Energy engineers. He said his concern was particularly related to young seismic faults and shallow gas pockets.

The project’s completion “will all happen after we both retire but, nevertheless, I am a shareholder and I am worried,” Bouman wrote. “All this (is) probably hearsay and no science or hard facts but still, I get this sinking feeling.”

A spokesman for Sakhalin Energy Investment Co. Ltd., of which Shell owns 55%, said the well design was revised in 2005. He declined to comment on “the particular issues raised by the author” of the e-mail.

Van Spronsen denied that the problems identified in the e-mails are the reason for the cost overruns now troubling the project.

The Sakhalin II project is an oil and gas project managed by Shell in the Russian Far East, which is facing difficult negotiations with the Russian government after its budget doubled to $20 billion last year and its delivery was delayed by six months. Russian authorities have also threatened to cancel the project’s environmental permit.

Shell Chief Executive Jeroen van der Veer said Monday that environmental violations had all been resolved.

The disclosure of the e-mails may raise a new risk for the project. Environmentalist group WWF, which showed the e-mails to Dow Jones Newswires, said Russian authorities should review the well designs.
Bouman, who confirmed to Dow Jones Newswires that the e-mails were genuine, and Van Spronsen, who neither confirmed nor denied their authenticity, are now retired.

Van Spronsen said he consulted Bouman because he ran the Groningen field in the Netherlands that was the best example within Shell of the type of well planned for Sakhalin’s Lunskoye field. Groningen was operated by NAM BV, a joint venture between Shell and ExxonMobil Corp.

“I would never ever want to be schedule-driven pre-(final investment decision) on a 9 billion (dollars) project,” he said. “That is asking for problems.”

Van Spronsen responded to Bouman with an e-mail dated June 5, 2002. “I share sometimes the same feeling as you about schedule,” he said. “One problem we have, however, is that the Russian approval system requires an early lock-in of about everything. Any change (in the technical specifications) immediately sets off a whole series of new environmental impact calculations.”

In an interview this month, Bouman told Dow Jones that he had at the time told engineers visiting from the Sakhalin project that they risked a gas blowout because they planned to drill across young fault lines with gas plumes from the seabed.

Four weeks after his May 29, 2002, e-mail, Bouman sent another to Van Spronsen, asking about the chances of reactivating faults if the wells were drilled through them. He proposed a separate solution that “would avoid drilling through the faults at high angles.”

Bouman said his solution was rejected because it would have delayed the investment decision that was ultimately made a year later, in May 2003.

In an e-mail to Dow Jones, Van Spronsen denied that the doubling of the project’s budget in 2005 and the alleged technical problems now under scrutiny were caused by choosing poor solutions because of time pressure.

But Bouman was concerned enough to want to distance himself and NAM from the project’s design.

“I also hope nobody will state somewhere that NAM has reviewed their design and it is now OK,” Bouman wrote in which one of the e-mails. “We as NAM did not tell Sakhalin all was well with their (…) well.”

In the e-mail, Bouman suggested he wasn’t the only Shell manager to worry about the project. He said Shell manager Teun van Waart, now retired, had told him that Shell’s exploration and production business, declined to develop the Sakhalin field because the risks were too high, but that the gas and power unit had signed a contract. Van Waart didn’t return calls seeking comment. Shell referred requests to comment on all the details contained in the e-mails to Sakhalin Energy who declined to comment on this matter.

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