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The Independent (UK): Shell insists Russia will make $80bn from Sakhalin-2 project

By Saeed Shah
Published: 27 October 2006

Shell insisted yesterday that the Russian state should expect to heap revenues of up to $80bn (£44bn) from the giant Sakhalin-2 oil and gas project that the Kremlin has accused of breaching environmental rules.

The Anglo-Dutch oil giant said that it should recoup its costs by 2013, after which revenue payments to the Russian state would soar.

Shell is embroiled in a showdown with the Kremlin over the cost of the scheme, put by Shell at $20bn, which the authorities accuse the company of inflating. The Kremlin is concerned about the estimated cost – raised by Shell last year from $12bn to $20bn – because the big payments to the state do not kick in until the Sakhalin project has recouped its costs. Russia has also accused Shell of “criminal” violations of environmental standards at the project, located off the east coast.

Reporting better-than-expected third-quarter results yesterday, Shell said that 70 to 80 per cent of the increased costs at Sakhalin would be borne by the operating companies.

The company, which has a 55 per cent stake in Sakhalin-2 and operates it, said that Russia would get revenues of $300m a year from 2008, when the project starts full production. Under the production-sharing agreement with the government, 6 per cent of revenues will go to the Russian authorities under the initial phase of the project.

Peter Voser, Shell’s chief financial officer, said that, if crude oil prices are maintained, costs should have been recovered by 2013, after which a much greater proportion of revenues would go to the Russian administration. Over the 30-to-40-year life of the project, Shell estimated that the Russian government would receive $80bn, if the price of oil averaged $50 a barrel. At $34 a barrel, revenues would be $50bn.

Jeroen van der Veer, Shell’s chief executive, said that he had visited Russia last week. “I met various ministers … I had helpful meetings and we hope to be able to resolve the issues and misunderstandings,” Mr Van der Veer said.

Shell is also negotiating an asset swap that would bring the state-run Gazprom into the venture. Mr Van der Veer said: “I assume that by sitting down and having discussion, we will have solutions that are acceptable to both parties. The win-win situation is that we get it up and running and fulfil all the permits as soon as possible. If the project is up and running, we’ll have year-round LNG [gas] sales.”

Shell beat all forecasts with a 21 per cent jump in underlying third-quarter profits to $6.7bn, thanks to high oil prices and strong output figures. The company stoked speculation about large-scale mergers and acquisitions after declining to repeat last year’s stated position that deals over €10bn (£6.7bn) were not attractive.

http://news.independent.co.uk/business/news/article1932775.ece

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