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Daily Telegraph: Shell and Japanese to pay Sakhalin bill

Sakhalin II project

(Paying the cost overruns, part of a secret protocol, will allow spending on the Sakhalin project to be increased)

By James Quinn
Last Updated: 1:34am GMT 29/12/2006

Royal Dutch Shell and its two Japanese partners are to be made to foot the bill for huge cost overruns at the Sakhalin-2 oil and gas project in Russia.

Shell – along with partners Mitsui and Mitsubishi – are set to cover $3.6bn (£1.8bn) of costs on the project just a week after agreeing to sell half their stakes to Russia’s Gazprom for $7.45bn in cash.
Paying the cost overruns, part of a secret protocol, will allow spending on the Sakhalin project to be increased

The costs are part of a secret protocol being imposed on the three firms by the Russian government to help to cover the $10bn of cost overruns on the project.

The deal will allow spending on the Sakhalin project to be increased – but not by as much as Shell had wanted. The terms of the protocol are understood to have been approved by Russian President Vladimir Putin, and will allow the cost of the project to double to $19.4bn. Shell had previously argued the budget should be $20bn.

The protocol, which has yet to be signed, would see the three firms foot the bill while Gazprom would not contribute anything because it was not an original investor. In addition, it is understood that, in spite of the extra investment, the three companies would receive no compensation under the production-sharing agreement with Russia which underpins the project.

Gazprom now owns 50pc plus one share in Sakhalin following last week’s deal.

The share-sale ended a year-long campaign in which the Russian government threatened to cancel construction permits on environmental grounds, and to approve requests to double Sakhalin-2’s investment plan.

News of the secret protocol came as a surprise to the market, prompting Shell’s ‘A’ shares to close down 11p at £17.92 in London.

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