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The Moscow Times: Audit Official Says Shell Will Likely Change Sakhalin PSA

Tuesday, November 28, 2006. Issue 3549. Page 5.
By Miriam Elder
Staff Writer

A top Audit Chamber official said Monday that he expected Shell to offer changes to its production sharing agreement for Sakhalin-2 soon to make the project more profitable for Russia, in a bid to end months of pressure against the oil major.

“We expect the project operator to show goodwill,” said Sergei Abramov, the Audit Chamber official charged with compiling an annual report on production sharing agreements, or PSAs.

“We want the project operator to step forward to improve the terms [of the agreement] for the Russian Federation,” Abramov told reporters.

The government is due to receive 10 percent of revenues from the project under the terms of the PSA it signed with Shell in 1994. But higher oil prices, Abramov said, should mean a larger slice of the profits.

“I am sure a mutually acceptable solution will be found. We think this will happen extremely soon,” he said.

Neither Shell nor project operator Sakhalin Energy could be reached for comment late Monday.

Abramov said the government had no intention of revoking the three PSAs it signed with foreign oil majors in the 1990s, although concern was growing over rising costs at the projects. ExxonMobil holds a PSA with the government for Sakhalin-1 and Total for the development of the Kharyaga field.

The government would never accept Shell’s doubling of its cost estimate at Sakhalin-2, Abramov said.

Shell, which runs Sakhalin-2 on behalf of minority shareholders Mitsui and Mitsubishi, raised the estimate last year to $22 billion. Talks with Gazprom on the gas monopoly joining the project have since stalled.

State officials have focused their criticism on Sakhalin-2, the country’s largest foreign investment project and the only major oil and gas venture without a Russian partner.

Abramov said that while Shell had failed to justify the higher cost estimate, Exxon had acted swiftly in addressing concerns at Sakhalin-1. Exxon runs the project for a number of minority shareholders, including state firm Rosneft.

The Audit Chamber said last month that it would reject Exxon’s cost estimate increase from $12.8 billion to $17 billion.

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