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The Times: Shell and Sakhalin-2 partners to absorb extra $3.6bn

December 29, 2006
Carl Mortished, International Business Editor
Royal Dutch Shell and its Japanese partners in the Sakhalin-2 gas project will be forced to swallow a third of the $10 billion (£5.1 billion) cost overrun suffered by the giant liquefied natural gas facility in eastern Siberia, according to reports from Moscow.

A confidential agreement between the Russian Government, Shell, Mitsui and Mitsubishi has settled the dispute over the project’s expanding budget on terms that require Shell and its Japanese partners to absorb $3.6 billion of the cost overrun. The partners had expected to be able to recoup the costs from first sales of gas. 
According to Moscow press reports, the new agreement sets the project’s total cost at $19.4 billion but stipulates that only $15.8 billion of the costs can be fully redeemed under the Sakhalin-2 production- sharing agreement (PSA), meaning that the remaining $3.6 billion must be borne by the original Sakhalin-2 partners.

The ballooning cost of the Sakhalin project was revealed by Shell only a week after it had signed an asset-swap agreement with Gazprom over its participation in Sakhalin in July last year. The doubling of the budget to $20 billion angered the Kremlin as any extra cost delays the start of royalty and tax income from gas sales.

According to the Moscow press, Andrei Dementyev, the Deputy Energy Minister, said that Shell, Mitsui and Mitsubishi could have avoided the cost overruns. “We said that foreign shareholders should take engineering risk on themselves and the shareholders agreed,” he is reported to have said.

The shaving of the last $3.6 billion from the approved budget means that the Kremlin will suffer a shorter delay in the receipt of tax and royalty payments. It may also mean that Gazprom, which last week agreed to buy a half-share in the project, will not bear any more of the Sakhalin cost burden, which is now capped at just under $20 billion.

Sources close to the project have told The Times that delays caused by the Kremlin’s harassment campaign against the project have sent costs climbing well beyond the $19.4 billion indicated by the reported deal with the Government and could have risen close to $25 billion. Shell was not available for comment yesterday.,,13133-2522299,00.html

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