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Reuters: Russian audit disputes $2.5 bln of Shell cost-paper

MOSCOW, Nov 13 (Reuters) – Russian state oil firm Zarubezhneft has audited the cost estimate of the Royal Dutch Shell-led Sakhalin-2 project and found it to be $2.5 billion too high, Vedomosti newspaper reported on Monday.

The Russian government has disputed the Shell figures since the Dutch-British firm doubled its estimate for the second phase of the project from $10 billion to $20 billion.

That would put the total cost of the venture, which involves building the world’s biggest liquefied natural gas plant on the Pacific island of Sakhalin, at $22 billion.

The cost increase would directly hit the Russian state because the structure of the contract — a production sharing agreement (PSA) — allows Shell and its minority partners, Japan’s Mitsui (8031.T: Quote, Profile, Research) and Mitsubishi (8058.T: Quote, Profile, Research), to recoup their own costs before sharing any profit with the government.

Russian officials have put pressure on Shell over the jump in costs, probing its environmental and technical compliance and threatening to sue the project for billions of dollars or even scrap the PSA altogether.

Vedomosti quoted two sources close to Zarubezhneft as saying the audit, which was commissioned by the Energy Ministry, was completed in July. The biggest cost overrun it identified was an $800 million overspend on contractor costs.

Contractors on the project include Russian firm Starstroi and Italy’s Saipem (SPMI.MI: Quote, Profile, Research).

Zarubezhneft, the Kremlin’s foreign oil company, sprang to prominence last year when it was named as the worst offender in a United Nations report into sanctions-busting payments to the former Iraqi regime of Saddam Hussein.

A spokesman for Sakhalin Energy, the company operating Sakhalin-2, was not immediately available for comment.

© Reuters 2006. All Rights Reserved.

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