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The Sunday Times: Russian threat to Shell: and a prospect of Shell having to “debook” reserves

December 17, 2006
Dominic O’Connell
 
ROYAL DUTCH SHELL’s cherished plans to boost production by 2009 are at risk from the continued struggle for control of its Sakhalin field in Siberia.

Jeroen van der Veer, Shell’s chief executive, was in Moscow on Friday for another round of talks with Alexei Miller, his counterpart at Gazprom, the state-controlled gas group. 
 
Gazprom is expected to take a large, and possibly controlling, stake in the Sakhalin II field from Shell. The deal could be announced early next year, along with an agreement on how cost overruns on the project will be apportioned. Shell declined to comment beyond confirming “constructive” talks had taken place.

Loss of control at Sakhalin could have serious consequences for Shell production plans put in place after the company’s reserves debacle two years ago. Then Shell was forced to admit it had overstated reserves, a shock that led to a clear-out of senior executives and a wholesale restructuring of corporate governanance at the group.

Analysts at Citigroup say if Gazprom does take a controlling stake in the Siberian field, it would jeopardise Shell’s target of producing 3.8m-4m barrels a day by 2009. “The sale of 30% to Gazprom would lower this to around 3.52m,” Citigroup said.

There is also the prospect of Shell having to “debook” reserves — a move that would provide a disturbing reminder of the previous reserves fiasco. Citigroup said the effect on reserves is unclear because “the company has not indicated the quantity already on its books”.

Other institutions agree. “This (loss of control of Sakhalin) would put a serious dent in the company’s target of achieving 3.8-4m barrels a day … (It) would essentially see Royal Dutch Shell being ex-growth in volume terms to the end of the decade,” said a note from Merrill Lynch.

Van der Veer’s negotiations are also thought to cover the difficult issue of cost overruns at the Sakhalin II project.

Development costs have risen from $10 billion (£5.1 billion) to $20 billion, and could go even higher, according to reports last week.

The profitability of the project will be determined by how much of the cost overruns the development consortium is allowed to recoup from the project’s revenues, and how the remaining profits will be allocated between the companies and the Russian government.

Meanwhile, the British lawyer who has been advising the Russian environmental agency, Rosprirodnadzor, on a possible action for damages against Shell, said talk of a $30 billion claim was not fanciful.

Mark Stephens, partner at Finers Stephens Innocent, said Shell had been responsible for “environmental vandalism” on Sakhalin. “It could cost $10 billion to relay pipelines, and if we proceed under American laws then triple damages would apply,” he said.
 
http://www.timesonline.co.uk/article/0,,2095-2508195.html

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