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Financial Times: Shell optimistic on Sakhalin

By Ed Crooks, Energy Editor: Published: October 27 2006 03:00 | Last updated: October 27 2006 03:00

Royal Dutch Shell hopes to be able to resolve the disputes that are dogging the Sakhalin-2 gas and oil project off the far-east coast of Russia, Jeroen van der Veer, the company’s chief executive, said.

He was speaking as the company produced results well ahead of analysts’ expectations, with a 33 per cent underlying rise in earnings per share for the third quarter, in spite of production problems caused by insurgent attacks in Nigeria.

Sakhalin-2, which is 55 per cent-owned by Shell, is now more than 80 per cent complete and on track for first LNG deliveries in 2008, Mr Van der Veer said.

He added: “We hope to be able to resolve issues and misunderstandings through discussions. I see the environmental and economic issues. For both, I see pathways forward.”

Sakhalin-2 is one of the three large-scale projects of the type that Mr Van der Veer believes represent Shell’s future.

The other two are the Athabasca oilsands development in Canada, where Shell this week offered to buy out the minority interest in Shell Canada, and the liquefied natural gas development in Qatar.

On Wednesday, the Russian government extended its environmental probe into Sakhalin-2 by another month and increased pressure on the $22bn (£11.7bn) project by threatening to bring criminal charges for damaging the country’s forests.

Russian officials have suggested that rising costs at Sakhalin-2, which would cut the benefit of the project to the Russian government under the terms of the production sharing agreement, may be part of the explanation for the authorities’ tougher line recently.

For the three months to September, Shell had pre-tax profit of $10.8bn ($15bn) on turnover of $84.3bn ($76.4bn).

A dividend of €0.25 (€0.23) will be paid out of earnings per share of 93 US cents (135 cents).

For the nine months to September, Shell had pre-tax profit of $35.5bn ($36.4bn) on turnover of $243.3bn ($231.2bn).

Its shares rose 46p to £18.88 yesterday.

FT Comment

*Results that were much better than expected, with production a particularly nice surprise, pleased investors. But they do not say much about Shell’s prospects, either short or long term. Short term it is the oil price that counts and that is threatened by slackening US demand. Long term, Shell’s future depends on it making a success of some big and complex projects, including Sakhalin. Sorting out the row with Russia would help but not end that uncertainty.

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