ShellNews.net: Are these astonishing allegations about the Sakhalin-2 project true or false?

By Alfred Donovan

Monday 14 May 2007

The following Royal Dutch Shell Directors and officials were given advance sight of the article below and have chosen not to comment or seek injunctive legal proceedings: Shell CEO Jeroen van der Veer, Malcolm Brinded (Executive Director of Shell EP), Keith Ruddock (General Counsel Shell EP), Richard Wiseman (General Counsel Shell International Ltd), Michiel Brandjes (RDS Plc Company Secretary) and last, but not least, Jorma Ollila, Chairman of Royal Dutch Shell plc.

THE ARTICLE

The information about Sakhalin Energy contains serious allegations. It is published with a health warning regarding its veracity. The source of the information is unknown.

When the first information arrived the name of the sender was given as David Greer. Mr Keith Ruddock, General Counsel of Shell EP, kindly contacted David Greer, Deputy CEO of Sakhalin Energy, to ask if he had in fact sent the email. Mr Greer stated that he had not done so.  This fact has now been confirmed by the sender of the email who has not explained the reason for the deception.  Shell has described the email as being a forgery. 

This is what the sender said when I raised the matter in subsequent correspondence:

The choice of Pseudonym may be considered inappropriate, but the objective was not to develop personal credibility or reputation.  If the information is factually correct then it requires no qualification?

The objective was to expose a situation and therefore, there were a number of recipients to the email!  Many are invited to dine on this information and he who publishes, will dine again!

The entire information – every single word published herein, has been seen in advance by the legal department of Royal Dutch Shell.  Shell General Counsel have been given the opportunity to identify any incorrect information in relation to basic elements, for example whether any of the contractor or other names stated as being associated with the Sakhalin-2 project is untrue.  We invited them to bring any categorically false information to our attention. 

In addition we also checked with a number of Shell insiders, one of whom has a strong connection with Sakhalin Energy. None of them has confirmed the veracity of any of the allegations. On the other hand, none have picked holes in the basic information.  All believe the information supplied to be plausible. They all share my own gut instinct about the veracity of the content.

We do not know the motive of the person who sent the information. When you read it you will probably agree that someone has gone to a lot of trouble and appears to have a high level of knowledge. Under the dubious circumstances in which it was conveyed, the information should be viewed with suspicion and appropriate caution.

What do you make of it? Can you confirm any of the allegations? Alternatively can you say for a fact that anything stated is untrue? Please let me know via my email address [email protected]

If you want to remain ANONYMOUS please post any comments on Live Chat.

Is it of any significance that Shell has had an opportunity to obtain an injunction to prevent publication but has chosen not to do so? Perhaps they are satisfied with the health warnings attached to this information.  

INFORMATION SUPPLIED ON 11 MAY 2007

Shell – Sakhalin II – The Demise of Sound Values, Democracy and Accountability 

In 2005, the Prime Contractor for Shell’s troubled Sakhalin II Onshore Pipeline Construction project, Starstroi (Contractor) communicated to Sakhalin Energy Investment Company Limited (Client) that notwithstanding their Contractual obligation to construct the onshore pipeline project, they were experiencing serious cash flow difficulties.

In 2005 various Subcontractors who were under-performing in relation to scheduled progress, communicated to Sakhalin Energy Investment Company Limited (SEIC) that they were not being paid and this was affecting the Subcontractor’s ability to make payments to their Suppliers and Employees. Some of the Subcontractors ceased ordering the materials and equipment necessary to execute the work until such times as the overdue payments necessary to fund procurement were made.  The consequences of non-payment by the Contractor to the Subcontractor’s were evident by reference to the progress made at site, in terms of the chronological records of quantifiable work executed. 

This situation remained unaltered until the end of 2006 and the Sakhalin II project experienced numerous incidents of contract and regulatory breaches.  The Employer and Contractor did not have sufficient supervision or inspectors at site and there were many incidents of non-conformance with contractual, regulatory and legal obligations by SEIC’s Contractor.  There were also record numbers of accidents with some 18 fatalities. 

The dilemma SEIC faced was whether to stop the project or accept the non-conforming work and risk litigation or prosecution for infringement of Russian legislation.  The latter option was chosen.  SEIC’s behaviour is forcing staff to compromise on their own professionalism in order to get the product into the pipeline.

For some staff this compromise was too much and this led to the resignation of SEIC’s Environmental Coordinator Imogen Crawford and Environmental Lead, Oxana Titarenko and Quality Control Manager, Mr David Ball.  In addition to environmental issues, SEIC have consistently ignored reports produced by their Quality Control Department over a four-year period, which highlight hundreds of Contract and Russian Regulatory breaches. 

During 2006 there were numerous allegations made in the International press that Shell’s Sakhalin project was responsible for breaches of Russian Environmental legislation, resulting in damage to Sakhalin’s natural Environment.  During this period SEIC also experienced difficulty obtaining official permits and the land acquisition required to complete the construction of SEIC’s onshore pipeline.

The Onshore Pipeline is being constructed by SEIC’s Prime Contractor ‘Startroi’. Starstroi was created from the collaboration of their two main shareholders, consisting of Saipem SA who own 50% and Globalstroi Engineering (formerly Lukoil Neftegaztroi), who own 42.83%.  In 2006 Starstroi were experiencing internal conflict between Saipem and Globalstroi, which meant that they found it difficult to continue to work together as a cohesive organisation.

During the latter part of 2006, the conflict escalated between Saipem SA and Globalstroi Engineering, resulting in the two organisations refusing to work together and the immediate suspension of Sakhalin II construction activities.  The Contractor’s situation continued to deteriorate in 2006 until such time as the Contractor as an organization began to implode.

In October 2006, David Greer of Shell, the Deputy CEO of Sakhalin II attempted to mediate between Saipem and Globalstroi in an effort to resolve Starstroi’s internal problems.  The two warring factions refused to reconcile and the remaining work was divided between Saipem and Globalstroi, ensuring they worked in separate site locations. The separation was agreed by SEIC on the condition that the interpersonal and cultural conflict did not escalate. 

What then prevailed on the Sakhalin II project was numerous incidents of alleged bribery, manipulation of supplier costs, disorganisation, delay and confusion.  The Contractor’s departments responsible for Engineering, Construction, Permits, Project and Commercial Management were reliant upon expertise from both organizations.  However, the Personnel seconded from Globalstroi Engineering and Saipem SA into those departments had now been repatriated to their respective Employers. This separation meant that the Contractor Starstroi was no longer effective at managing the project.   

Early in 2007 Gazprom acquired 50% of SEIC and reserved the right to appoint the Commercial Director for the Sakhalin II project.  Realizing that Shell Management team seconded to SEIC may lose financial control of the project; Shell quickly altered the financial strategy.  The individuals within SEIC Onshore Pipeline Team with financial authority are comprised entirely of Shell staff seconded to SEIC. 

SEIC is now finalizing an agreement to pay all of Starstroi’s future costs regardless of entitlement, subject to the contractor agreeing to a Contract amendment.  The amendment must be signed before the official date that will see Gazprom empowered to influence or challenge Tender Board decisions on the financial authority granted for the Sakhalin II project. 

The race is on for Shell to commit SEIC prior to Gazprom exercising its rights to a binding contractual obligation for additional expenditure before it can be challenged. 

SEIC have now paid all of the historical costs that the Contractor had claimed during the post-contract period, regardless of Contractor entitlement, abortive work, subsidiary enrichment or negligence.

The method used by SEIC is to reframe/fabricate where necessary the descriptions and substantiation required for Tender Board Approval.  The Tender Board is the official body representing the shareholders, empowered to increase the financial authority available to SEIC.  SEIC are now proposing to agree to a Contract Amendment that illustrates a completion date that is simply not feasible, in order to obtain shareholder buy in.  However, on paper this date could only be proposed if certain construction activities were carried out illegally in 2006.  

The payment of all historical costs was made on condition that the Contractor executed the 2006 work without obtaining the official permits as required by Russian regulatory bodies.  The Contractor claimed that financial duress forced their agreement and risk prosecution to complete the work on the condition that SEIC would bear the cost of any future damages. The proposed contract amendment now includes a scheme in which, in addition to paying any and all future costs for executing the remaining work, additional payments will be made over the course of the remaining period to induce the Contractor to continue.

The Contractor’s concerns are that the proposed Contract Amendment could be construed as an offer by SEIC to the Contractor who has been placed in a position of trust by Russian Regulatory Bodies, in order to induce them to behave in a way that is inconsistent with that trust.  If this offer had been made directly to a Russian official it may have been construed as a bribe, which raises the question of whether this interpretation is relevant to the proposed Contract Amendment.  Shell intends to commit their investors to an alleged cost, which is in fact a financial inducement offered to the Contractor by means of deception.  The gamble by Shell is that no independent audit of SEIC costs will take place once Gazprom become the official Custodian of SEIC.

The division and separation of the work between Globalstroi and Saipem SA is now providing evidence that Globalstroi are outperforming Saipem and will finish their work sections first.  This has led to concerns within SEIC that the existing SEIC Organisation may be restructured with the removal of the certain Shell and Saipem SA seconded staff.  

It is for this reason that SEIC under the direction of Shell recently merged the project management organisation to include the Prime Contractor’s staff in order to create the perception of a reciprocal critical reliance on each other to complete the project.  

This strategy is intended to make it difficult for the future SEIC board, which will include Gazprom to comment on the appropriate level of participation of SEIC existing Project Management Team or the Contractor as independent organisations.  The SEIC/Contractor alliance is somewhat unorthodox given that SEIC are the representatives of the shareholders.  There are concerns that Gazprom will question whether it is appropriate to merge on decisions relative to methods and costs, which create opportunities for the Contractor at the expense of the shareholders.  

The decision to integrate SEIC/Contractor as a single management team has provided an opportunity for the Contractor to increase revenue. The Contractor is now adopting a procurement strategy of single sourcing suppliers. This is authorised by SEIC and financed by Shell’s shareholders.  The Contract has changed from a lump sum agreement to the full reimbursement of all Contractor costs.  There is therefore, no financial incentive or contractual obligation for the Contractor to procure on principles of best practice.  The cost to SEIC equates to the revenue for the Contractor, whose financial objective will be to achieve the maximum revenue possible.  

There have been allegations that the Contractor is communicating the desired costs to potential suppliers in order to manipulate the supply chain.  Some of the suppliers are allegedly subsidiaries of Globalstroi Engineering Shareholders and there have been incidents where members of Globalstroi staff are occupying roles within both the Contractor and Subcontractor organisations.  When this situation is discovered the individual simply resigns from Globalstroi, but the supplier remains in place.  An example of this kind of supply chain manipulation by the Contractor now exists as evidenced by the position of a Mr. V Koslov.  Mr Koslov is employed by Globalstroi Engineering and is also the General Director of their Subcontractor JSC Leasingstroymash. 

All of this seems to be in contrast to Shell’s philosophy to promote sound values, democracy and accountability!

INFORMATION SUPPLIED FROM THE SAME SOURCE ON 13 MAY 2007

The Contract amendment has not at this time been signed!  Mr Campbell Wyper of Shell is the most Senior member of Shell involved in the pending deal between Sakhalin Energy and their Contractor. Mr Wyper has tasked the Onshore Pipelines Commercial Manager Mr Robert Boulstridge ‘[email protected]’ with responsibility for authorising the payments once agreement is reached and their Senior Contracts Advisor Mr Martin Seaman ‘[email protected]’ with finalising the wording of the document that both parties will be required to sign.

If you were to request answers to the following questions from Shell, this would not expose you to litigation.  These will be unwelcome questions!

1. Is there any intention to enter into an agreement, which will see the Contractor enriched far in excess of their existing entitlement, at the expense of the Shareholders?

2. Have Shell declared in writing to the Russian authorities any breaches committed by their Contractor as evidenced by SEIC’s project ‘non-conformance’ notifications?

3. What if any is the quantifiable number of incidents of regulatory breaches illustrated on non-conformances notifications?

4. When it is required by Russian legislation, is there an official permit in place for every river crossing that has now been complete?

INFORMATION SUPPLIED FROM THE SAME SOURCE ON 14 MAY 2007

I am the author, it is not an extract from a report!

You can disclose the information you have and question 3, which is posed in a way that implies there are many incidents and seeks disclosure.

The project is being run and resourced as dictated by Starstroi and their Subcontractors, regardless of whether the resources are required by SEIC, with all costs borne by SEIC.  The opportunity cost for ensuring that only suppliers that are critical to construction are procured is not an option.  The behind the scenes manipulators who are the beneficiaries of some of the additional cost to SEIC are controlling outsourced resources.  This is possible because they form part of the Contractors Subcontract Administration organisation.

Within the SEIC organisation there are literally hundreds of Russian staff recruited to ensure ‘Russian Content’, who occupy positions without possessing the required qualifications or experience to fulfil the role.  Starstroi’s administration and commercial management of all suppliers/subcontractor’s is undertaken by unqualified staff, whose procurement and management methods do not conform to accepted international or financial accounting standards. 

Record keeping is confined to information on lists, which are consistently proven to be inaccurate.  This ensures that auditing of accounts where additional cost has been authorised, which is in addition to what was originallly agreed under contract will be difficult if not impossible!

David Greer has compromised himself because of a relationship he has with a member of the Transavto organisation and personnally intervenes if Transavto ‘rates’ for supply of Transavto equipment or its requirement are questioned.

MORE INFORMATION RECEIVED FROM THE SAME SOURCE ON 14 MAY 2007

To complete the project in the correct manner, observing the various constraints identified by reference to QC/QA methods would see the Sakhalin II pipeline construction phase complete in August 2008. 

This date is unacceptable, so it has been decided some corners must be cut, which involve compromising on the following:

• Insuffient or no Erosion Protection to rivers and embankments

• Ignoring legislative requirements – Water Protection Zones

• Tree Felling without Tree Felling Permits to avoid the wait

• Crossing Rivers without due care and without the required Permits/Authority to avoid delay

• Insufficient excavation/cover/backfill material for pipeline

• Damage to federal roads, through insufficient maintenance

• Damage to federal roads, driving heavy vehicles in winter thaw period

• Plan to clean and gauge the pipeline without drying

• Inadequate Engineering Solutions – pipeline route at Seismic fault-lines

• Suppression of reports of non-conforming work

• Approval of all work

• Subcontractors without SEIC official reprimand, undertaking work at night in order to avoid detection by SEIC QA/QC, and third party inspectors.

• Work carried out at night without supervision/inspection, accepted as fully conforming by SEIC, when impossible to know for sure.

All the above is the price worth paying in order to get the product into the pipeline by the desired date.  Shell are offering substantial bonuses to the Shell staff seconded to SEIC if they can make the date happen. 

It may happen, but the total cost will be intangible until the extent of environmental damage, if any, fines and future remedial repairs is calculated. 

The pipeline could leak, if non-conforming work is not appropriately reported and rectified.

Quality Control is essential to the safe and successful construction of an Oil and Gas pipeline.

Related article: ShellNews.net: Regarding “Are these astonishing allegations about the Sakhalin-2 project true or false?”

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