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The Sunday Times: Drilled down

Sunday 29 October 2006

AFTER a difficult few years, there were finally reasons for smiles at Shell last week. Jeroen van der Veer, chief executive, unveiled a record set of results with a flourish — it seems difficult to conceive of a company having net income of $7 billion in a single quarter, but that’s what Shell announced.

But it’s never that easy in the oil business. Just as Van der Veer was setting hearts a-flutter with his big numbers, there were worrying noises coming out of Russia.

There has been a steady sniping by the Russian authorities about Shell’s handling of the development of the Sakhalin II field. Sakhalin is important for Shell (and its Japanese co-investors). Their consortium has the right to 4 billion of the 45 billion barrels of oil and gas under the ground there, making it one of the “elephant” developments that should assure the company’s future production.

But the Russians say they have evidence of environmental infringements, and have started to question the consortium’s tax record. These complaints will have a familiar ring to anyone in the oil business — it sounds like the Russian authorities are starting down the familiar path of pressuring their western partners to give up some of the benefits of the deal, or to withdraw altogether.

While Shell’s rivals might enjoy their competitors’ discomfort in the short-term, they should be worried. Russia’s immense oil and gas wealth means nearly all have interests there, and could tomorrow find themselves in the same position as Shell.,,2095-2426288.html and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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