Reuters: Shell denies Sakhalin costs have risen again

Thu Dec 14, 2006 4:53 AM ET
By Dmitry Zhdannikov

MOSCOW, Dec 14 (Reuters) – Royal Dutch Shell denied on Thursday that it had again increased costs of its Sakhalin-2 oil and gas project as such a move would further complicate talks on including Russia’s Gazprom in the project.

The previous costs revision to $22 billion from $12 billion at Sakhalin in 2005 infuriated the state gas monopoly, which was then prepared to buy 25 percent in the project, and prompted a flurry of investigations by Russian authorities.

As pressure from officials began to threaten the project’s start date for supplying liquefied natural gas (LNG) to customers in Asia and the United States from mid-2008, Shell this month offered Gazprom control in the project.

On Thursday, The Times newspaper quoted sources close to the Shell-led group as saying overall costs had moved closer to $25 billion.

“We deny this news. Our cost estimates have not changed,” Shell’s spokesman in Moscow, Maxim Shub, told Reuters.

Russia, which has yet to approve the first spending increase, claims that any cost overrun would delay the moment when the country starts getting it share of profits in the production-sharing agreement with the Shell-led group.

But analysts say that Russia’s anger over the higher costs has served as a cover to enable the Kremlin to press for greater control over the country’s energy wealth and limit foreign involvement in strategic industries.

Sources told Reuters this week Shell was ready to sell 30 percent of its 55 percent stake in Sakhalin to Gazprom, while project partners Mitsui <8031.T> and Mitsubishi <8058.T> may reduce their stakes by 10 percent each.

CHANGE OF PSA

But sources said Shell still wanted to remain the project’s operator despite having a smaller stake than Gazprom, partly because the Russian giant has no experience in LNG despite being the world’s largest gas producer.

Russian newswires also reported this week that Gazprom may request to pay for its stake in Sakhalin from the project’s cashflows after the start of commercial production, over 20 months from now.

“No decision has yet been taken as to how and when Gazprom will pay for its stake,” a source close to Shell said on Thursday. Analysts’ estimates for half of Sakhalin-2 have ranged from $4 billion to $10 billion.

Analysts say that Shell would lose a lot if Gazprom managed to structure the deal in such a way that it would pay for its stake with income from LNG production.

“The irony of the situation is that we expect that the purchase price will be set close to the operator’s historical costs and that the historical costs under the PSA agreement were supposed to be recovered anyway,” Alfa-Bank said in a note.

“This means that, if the deal takes place as described, it would de facto change the terms of the PSA for the previous operators,” it said, adding that such as deal would further damage investor sentiment toward Russia.

Deutsche UFG brokerage said it believed Gazprom’s benefits from the project would be limited.

“We view Gazprom’s decision to enter this project as simply a reflection of state nationalism in the energy sector and the unwillingness to have major projects without Russian partners,” it said in written research.

© Reuters 2006. All rights reserved.

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