The Times: Harassment and delays push cost of Sakhalin-2 to $25bn

December 14, 2006: Carl Mortished, International Business Editor

Russia accused of bullying staff
Expatriates fear withdrawal of visas
 
The cost of Royal Dutch Shell’s Sakhalin-2 gas project is close to $25 billion (£12.7 billion), a rise of $5 billion from previous estimates, after a campaign of harassment by the Russian Government, The Times has learnt.

Progress on the project has been delayed by harassment that includes refusal of drilling permits and visas and the bullying of Shell staff. The soaring costs and delays come as Shell’s responsibility for Sakhalin is being reduced. 
 
The late start of drilling at Lunskoye, a huge offshore gasfield, threatens to delay vital deliveries of liquefied natural gas (LNG) to Shell’s Japanese and South Korean customers, due to start in September 2008.

Sakhalin Energy, the project’s operator, gave warning that it was still waiting, after two months of delay, for a permit from RosPrirodNadzor, an environmental agency, to start work at Lunskoye, scheduled for next month. Igor Ignatyev, vice-president of Sakhalin Energy, said: “The [Lunskoye] timetable is no longer realistic. It will be a serious factor to keep to project deadlines.”

Sakhalin sources indicated that the overall cost of the project has moved to close to $25 billion since Shell doubled the budget in June last year to $20 billion. The expanding costs will further complicate the negotiation over Gazprom’s purchase of a 50 per cent stake in Sakhalin Energy.

The project is governed by a production-sharing agreement (PSA) that allows the operator to recover all its costs from gas sales before the allocation of profits, taxes and royalties. The Russian Government now regards the PSA as too favourable to Shell and has yet to agree to Shell’s new cost estimate. The continuing harassment of the project, delays caused by environmental inspections and the persecution of expatriate staff, have taken their toll. Foreign workers in Sakhalin are being prosecuted for visa violations. About 600 are being targeted and several have appeared in court to pay fines.

Sakhalin sources indicate that expatriates are becoming fearful and concerned that the visa infractions leave them with criminal records that allow the Government to revoke work permits at any time. Some staff have been told to leave, while others have stayed but cannot work. Shell said that there are problems with converting visas to work permits. However, yesterday it said that an estimate of the project cost was unchanged.

The pressure on Shell grows as negotiations begin over Gazprom’s acquisition of a controlling stake in Sakhalin Energy. The Kremlin has long resented Shell’s control over Sakhalin-2, the only significant energy project in Russia without Russian participation. To try to end the harassment, Jeroen van der Veer, Shell’s chief executive, offered Gazprom a controlling stake on Friday, but talks continue about the price.
 
http://business.timesonline.co.uk/article/0,,13130-2502566,00.html

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