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Financial Times: There are times when you cannot be sure of Shell

By Chris Hughes
Published: December 29 2006 02:00 | Last updated: December 29 2006 02:00

Sakhalin throws up a fresh disappointment

Shell suffered a blow when it was forced to surrender control of Russia’s Sakhalin-2 oil field to state-backed Gazprom last week. Now the Anglo-Dutch oil group faces fresh embarrassment in defeat.

To re-cap, Shell sold half of its 55 per cent stake in Sakhalin to Gazprom to revive the project that Russia had grounded citing environmental reasons. The price Shell received – following months of wrangling – was better than many had expected. That helped Shell preserve some dignity despite losing control.

But yesterday it emerged that the terms of this transaction are not as favourable as they had seemed. Shell will have to contribute additional investment to Sakhalin beyond what investors had previously factored in.

This rather inconvenient detail was meant to stay confidential. Instead, it leaked into the Russian media.

True, this is a small setback relative to losing control over Sakhalin in the first place. From a solely financial perspective, the additional costs are not hugely burdensome for a company of Shell’s size. That was reflected in Shell’s relatively muted share price reaction yesterday.

But this is still a humiliating end to the saga for Shell. Meanwhile, the clumsy revelation of Shell’s true funding obligations raises questions about its communication skills. Surely the company could have been clearer in its guidance on the deal’s underlying economics last week.

Copyright The Financial Times Limited 2006

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