Royal Dutch Shell Plc  .com Rotating Header Image

Reuters: INTERVIEW-Putin aide says Russia got little from Sakhalin deal

Tue 14 Nov 2006 13:01:37 GMT
By Gleb Bryanski

MOSCOW, Nov 14 (Reuters) – Royal Dutch Shell’s $22 billion Sakhalin-2 oil and gas project has failed to spur Russia’s economy because supply orders went to foreign not domestic firms, the Kremlin’s top economist Arkady Dvorkovich told Reuters.

Russia is at loggerheads with the Shell-led group running the giant Sakhalin project in Russia’s Far East, where costs have more than doubled and inspectors have found a string of technical and environmental violations.

Cost overruns at the world’s largest liquefied natural gas (LNG) project mean that, under a production sharing agreement signed in the 1990s, the Russian state’s revenue stream will be delayed. The deal allows for costs to be recouped first.

Dvorkovich, head of the Kremlin’s economic staff, complained in an interview with Reuters that Russia’s petroleum engineering sector had missed out on landing Sakhalin-2 orders, meaning that the economy had failed to enjoy a wider stimulus from the project.

“We did not receive the benefits we had hoped for from the point of view of involving Russia’s economic resources in the project,” he told Reuters in remarks cleared for publication on Tuesday.

“If a company is only interested in exporting raw materials, its actions do not fully correspond to Russia’s national interests.”

But Dvorkovich pledged the Kremlin had no intentions to pull out of the deal as long as a series of environmental violations found by inspectors on Sakhalin island, offshore Russia’s Far East, are fixed.

“We are not going to review the agreement,” Dvorkovich said.

Russia’s environmental watchdog Oleg Mitvol said last week he may sue Royal Dutch Shell’s Sakhalin group in the international courts to claim billions of dollars in damages or even scrap the production sharing deal.


Dvorkovich, a 34-year-old U.S.-educated economist, denied environmental issues were being used as a weapon by the state to push Shell into reviewing the terms of the deal or ceding its share to another company.

“This is not an attempt to cajole the company into reviewing the deal,” Dvorkovich said. “It may look like a planned campaign but it isn’t one.”

The doubling of costs has infuriated Russian gas monopoly Gazprom , which was planning to take a one-quarter stake in Sakhalin-2. Analysts say the pressure is designed to force Shell to cede a stake cheaply, or face further delays.

Dvorkovich confirmed that Gazprom wanted to acquire a stake in Sakhalin-2 but said it was a matter for bilateral talks between the firms in which the state was not involved.

“There is Gazprom’s intention to enter this project but this is a bilateral issue and the state plays no role there,” he said.


Dvorkovich said the way Sakhalin-2 project has been developing does not correspond to Russia’s long-term goal of using the energy sector as a driver of growth in the manufacturing sector.

“We want the energy sector to be the driver of growth in machine building, we want to process raw materials on Russia’s territory, we want to export not only raw materials but finished goods as well,” he said.

Dvorkovich said most of the machinery and equipment orders for Sakhalin-2 went to foreign firms even in cases when Russian firms were competitive.

He mentioned one particular case when an order for an offshore oil platform went to a foreign firm because it had pledged to deliver six months ahead of its Russian competitor. In the end, delivery was 18 months late.

“It was also more expensive, of course, and on top of that during the next 20-30 years all maintenance expenses will go abroad as well,” Dvorkovich said.

Sakhalin Energy, the project’s operator, says on its website it has to favour Russian companies over foreign ones under the production sharing agreement, all else being equal. It aims to have 70 percent Russian content over the project’s life.

© Reuters 2006. All Rights Reserved. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Reuters: INTERVIEW-Putin aide says Russia got little from Sakhalin deal”

Leave a Comment

%d bloggers like this: