THE SHELL LEAKS FILES

SLF-2007-020

The Sakhalin Papers X: The Letter to Putin — A $26 Billion Warning Before the Showdown

Archive reference: SLF-2007-020
Collection: The Sakhalin Papers
Principal document: Alfred Donovan’s communication addressed to President Vladimir Putin, dated 25 November 2005
Supporting record: Shell’s 2005 Annual Report, contemporaneous financial reporting, EBRD records, SEC litigation materials and the WIPO administrative decision
Evidence limitation: The surviving document establishes what Alfred Donovan wrote. It does not, by itself, establish delivery to, receipt by or consideration within the Kremlin.

Introduction

On 25 November 2005, Alfred Donovan addressed a three-page communication to Russian President Vladimir Putin.

Its subject was uncompromising:

“Shell fails to deny $26 billion overrun figure on Sakhalin2.”

The letter argued that Putin’s publicly reported concerns about Shell’s management of Sakhalin-2 were justified. It combined information already in the public domain with a substantially more serious allegation attributed to a confidential Shell source: that a recent technical review had concluded the project’s final cost would be at least $26 billion.

The communication ended with a sentence that defines its intended purpose:

“With this letter I have now done all I can reasonably do to warn the Russian Government.”

This instalment examines what was known publicly when the letter was written, what depended upon confidential sourcing, what subsequent records corroborate—and what the evidence cannot prove.

1. The Letter Did Not Arrive in a Vacuum

By November 2005, the Sakhalin-2 cost problem was no secret.

In July, Shell disclosed that Phase 2 investment costs were expected to reach approximately $20 billion, roughly twice the previous estimate, while the project schedule had also slipped. Contemporary reporting described a $10 billion overrun and an anticipated delay.

Shell’s subsequent 2005 Annual Report confirmed that Sakhalin Energy had estimated Phase 2 costs at $20 billion and described the increase as representing “very substantial cost overruns.” It also recorded that Shell then held 55% of Sakhalin Energy and was discussing an asset swap under which Gazprom might acquire 25% plus one share.

Shell Chief Executive Jeroen van der Veer publicly acknowledged the reputational consequences. In a July 2005 interview reported by the Financial Times, he said the increase affected Shell’s reputation and accepted that the company had not performed well on Sakhalin.

The $20 billion figure was therefore established corporate fact.

The proposed $26 billion figure was not.

2. Putin Had Already Challenged Shell

The chronology requires precision.

Alfred Donovan’s letter did not alert Putin to Sakhalin cost escalation before Russian concern existed. It followed Putin’s state visit to the Netherlands on 1–2 November 2005, an event confirmed by the official Kremlin archive.

Reuters reported that, during that visit, Putin had spent more than 30 minutes criticising the cost increase and had indicated that Russia would not simply approve Shell’s request to increase the project budget to $20 billion. Russia’s Energy Ministry was also reported to have requested further justification for the expenditure.

The cost question had a direct fiscal dimension.

Sakhalin-2 operated under a production-sharing arrangement. Increased recoverable project expenditure could delay the point at which the Russian state received a larger share of project revenues. That made the overrun a matter of public finance and state policy, not merely a problem between Shell and its shareholders.

Alfred’s letter should therefore be understood as a follow-up intervention. It sought to reinforce an existing Kremlin concern with a more alarming estimate attributed to insiders.

3. The Central Allegation: At Least $26 Billion

The most consequential passage appears on page two.

Alfred wrote that information from a “reliable insider source at Shell” indicated that the cost would exceed the figures then appearing in the press. According to the letter, a new Sakhalin management team had completed a technical review and concluded that the final cost would be at least $26 billion.

The distinction between the various figures is essential:

• $20 billion was Shell’s disclosed estimate.
• $22 billion had been reported by The Observer, based on unnamed sources.
• $26 billion was attributed by Alfred Donovan to confidential Shell information.

The supplied archive proves that the $26 billion warning was written and directed towards Putin.

It does not independently authenticate the alleged technical review or identify the insider.

Those matters require the underlying correspondence, source material or subsequent corroboration.

4. What Shell Allegedly Did Not Deny

Alfred’s letter stated that he had raised the $26 billion figure in correspondence with Shell General Counsel Richard Wiseman earlier that month.

It further stated that Jeroen van der Veer and Malcolm Brinded were copied into the exchange and that none of the three denied the figure.

That claim is potentially important—but must be treated with evidential discipline.

A failure to deny an allegation is not the same as confirming it.

Corporate lawyers and executives may decline to engage with confidential forecasts, commercially sensitive information, anonymous-source claims or correspondence they regard as adversarial. Silence can have several explanations.

The present file does not include the complete Wiseman correspondence. Until that exchange is examined, the archive can establish only that Alfred represented the matter in these terms to Putin.

It cannot convert an alleged non-denial into a corporate admission.

5. The $22 Billion Reporting

The letter cited an October 2005 Observer report stating that costs could reach $22 billion.

That report described a project originally budgeted at around $10 billion whose escalating costs had complicated Gazprom’s proposed participation and Shell’s financing position.

This reporting gave the $26 billion allegation a degree of contextual plausibility: public estimates were already moving beyond Shell’s $20 billion announcement.

But contextual plausibility is not proof.

The difference between $20 billion and $26 billion represented another 30% increase. A prediction on that scale required stronger evidence than an absence of denial.

6. The EBRD and Environmental Scrutiny

The letter also addressed the European Bank for Reconstruction and Development, stating that Shell was seeking financing while environmental campaigners urged the bank not to support Sakhalin-2.

Official EBRD records confirm that the bank was considering the project and that its accountability mechanism received a Sakhalin-2 complaint in July 2005 concerning disruption to fishing. The complaint was considered eligible for further problem-solving procedures, although not for a compliance review at that stage.

The project was therefore undergoing genuine institutional scrutiny when Alfred wrote to Putin.

The EBRD record also shows that the bank eventually decided not to finance Sakhalin-2 in January 2007 following the change in the ownership of Sakhalin Energy.

The letter additionally referred to concerns regarding the Western Pacific grey whale. Those environmental controversies were widely reported and formed part of the international debate surrounding potential project finance. They were separate, however, from the confidential $26 billion cost allegation.

The existence of genuine environmental controversy does not itself validate the insider estimate.

7. The Reserves Scandal as an Argument About Credibility

A substantial portion of Alfred’s letter placed Sakhalin within the aftermath of Shell’s reserves scandal.

This was not invented rhetoric.

In August 2004, the US Securities and Exchange Commission announced that Royal Dutch Petroleum and Shell Transport had agreed to pay a $120 million civil penalty after the SEC found that Shell had overstated previously reported proved hydrocarbon reserves by 4.47 billion barrels of oil equivalent.

The SEC said the 2002 overstatement represented approximately 23% of the proved reserves originally reported. Shell also agreed to spend an additional $5 million on an internal compliance programme.

The SEC’s order identified failures in reserves reporting, internal controls and the handling of warnings. However, Shell settled the proceedings without admitting or denying the Commission’s substantive findings.

That qualification matters because Alfred’s letter sometimes moved from documented regulatory action into advocacy.

A settlement may establish penalties, undertakings and legally recorded findings. It should not automatically be described as an admission where the settlement documentation expressly says otherwise.

Documentary conclusion

It was factually legitimate for Alfred to tell Putin that Shell had recently faced major regulatory action over reserves reporting.

It was commentary to use that history as proof that Shell’s current management could not be trusted about Sakhalin costs.

8. The Domain-Name Case

The letter also referred to Shell’s attempt to obtain the domain names royaldutchshellplc.com, royaldutchshellgroup.com and tellshell.org.

The official WIPO decision confirms that Shell International Petroleum Company brought the complaint against Alfred Donovan in May 2005.

A three-member administrative panel found that Alfred was making legitimate non-commercial use of the domain names and that the evidence did not establish bad-faith registration and use. The panel unanimously denied Shell’s complaint on 8 August 2005.

This part of the letter is therefore supported by the formal adjudicative record.

It also explains why the communication presented the Donovan website as an established channel through which Shell-related reporting, insider material and criticism were being published.

The WIPO result did not validate the website’s Sakhalin information. It established that Shell had failed to meet the requirements necessary to obtain transfer of the disputed domains.

9. The Satirical Passage

Near its conclusion, the letter warned Putin that the website carried a satirical feature containing invented comments attributed to Jeroen van der Veer and directed partly at the Russian president.

Alfred offered to remove the material as a courtesy if Putin objected, while stating that Shell’s Richard Wiseman had already demanded its urgent removal.

This passage is revealing for two reasons.

First, it shows that the communication was not purely a confidential technical briefing. It also arose from the long-running public confrontation between the Donovans and Shell.

Second, Alfred expressly identified the comments as invented satire. That distinction is important because it prevents the satirical material from being confused with genuine statements by Shell executives.

10. Was the Letter Received?

The present document bears a date, an addressee and a Kremlin postal address.

It does not include:

• an email transmission header;
• a postal receipt;
• a Kremlin acknowledgment;
• a reference number issued by the Russian presidential administration;
• a reply;
• or an internal Russian document showing that the warning was circulated.

Accordingly, the archive should not state as fact that Putin personally read the letter.

Nor can it state that the communication influenced Russian policy.

The reliable formulation is narrower:

On 25 November 2005, Alfred Donovan created and addressed a detailed warning to President Putin concerning Sakhalin-2, including an insider-sourced estimate of at least $26 billion.

Anything beyond that requires further documentary evidence.

11. What Happened Afterwards

The project crisis intensified during 2006.

On 21 December 2006, Gazprom, Shell, Mitsui and Mitsubishi agreed that Gazprom would acquire 50% plus one share of Sakhalin Energy for $7.45 billion. Shell’s interest was reduced from 55% to 27.5%. The transaction was recorded in Gazprom’s SEC filing and announced at a Kremlin meeting attended by Putin and the project shareholders.

That outcome made Alfred’s warning appear prescient in its broad conclusion that Shell faced a serious strategic and financial crisis.

It does not retrospectively prove the specific $26 billion forecast, nor does it demonstrate that the letter contributed to Gazprom gaining control.

Chronological sequence is not evidence of causation.

12. Documentary Findings

Established fact

Alfred Donovan produced a detailed communication addressed to President Putin on 25 November 2005.

It warned that the final Sakhalin-2 cost could reach at least $26 billion, attributed that figure to a Shell insider and referred to correspondence involving Richard Wiseman, Jeroen van der Veer and Malcolm Brinded.

Shell had already acknowledged a $20 billion estimate and substantial cost overruns. Putin had already publicly challenged the increase.

The SEC reserves action and the WIPO domain-name decision cited as background were genuine formal proceedings.

Not yet independently established

The existence and conclusions of the alleged internal technical review.

The identity and reliability of the confidential source.

The precise contents of the correspondence with Wiseman, Van der Veer and Brinded.

Delivery to or consideration by the Kremlin.

Any causal connection between the warning and subsequent Russian action.

Commentary

The historical importance of the document lies less in proving that Alfred Donovan correctly forecast the final project cost than in showing that, by November 2005, confidential warnings were allegedly moving beyond the website and being directed at the highest level of the Russian state.

It documents an attempted intervention before the Sakhalin conflict reached its 2006 climax.

Whether that intervention disappeared into a government filing system or entered the stream of information considered by Russian officials remains unresolved.

Sources

• Alfred Donovan communication addressed to President Vladimir Putin, 25 November 2005.
• Royal Dutch Shell plc, Annual Report and Accounts 2005.
• Wall Street Journal, Sakhalin-2 cost and delay report, July 2005.
• Financial Times reporting on Shell’s Sakhalin cost announcement and reputational impact, July 2005.
• Reuters reporting on Putin’s November 2005 criticism of Sakhalin-2 costs.
• Official website of the President of Russia, record of Putin’s Netherlands state visit.
• European Bank for Reconstruction and Development, Sakhalin-2 accountability-mechanism record.
• US Securities and Exchange Commission, Shell reserves enforcement action and civil settlement.
• WIPO Administrative Panel Decision, Shell International Petroleum Company Limited v. Alfred Donovan, D2005-0538.
• Gazprom SEC filing recording the December 2006 Sakhalin Energy transaction.

Archive disclaimer: Allegations and personal assessments are identified as such. No inference of criminality or misconduct should be drawn beyond the findings of the cited courts, regulators or adjudicative bodies. Site wide disclaimer also applies.

Next Archive File

SLF-2007-021 — The Sakhalin Papers XI: The $26 Billion Correspondence — What Shell’s General Counsel Was Asked, and What Shell Actually Said

The next instalment will turn from Alfred Donovan’s warning to the underlying exchange it described: correspondence involving Shell General Counsel Richard Wiseman, Chief Executive Jeroen van der Veer and Exploration and Production chief Malcolm Brinded.

The decisive question will not be whether Shell “failed to deny” the figure in the abstract.

It will be what was asked, what was answered, what was avoided—and whether the complete correspondence supports the way it was presented to the Kremlin.