CONCERN is mounting that Royal Dutch/Shell may
be forced to take a $10 billion hit (£5.6
billion) after the oil company’s chief executive
was harangued by President Putin about cost
overruns at the Sakhalin gas project in Siberia.
At a meeting in Amsterdam, the Russian
President is reported to have told Jeroen Van
der Veer that Shell’s revised budget for
Sakhalin was “economically unfounded” and would
not be approved.
Failure to secure Russian approval for the
$20 billion budget would mean that Shell would
be unable to recover early the $10 billion cost
overrun, which the company revealed in July.
Shell shares dipped sharply, falling 19p
per share to £18.19 as analysts assessed the
impact to profits of a delay in the recovery of
billions of dollars in extra costs at Sakhalin.
Shell confirmed that Mr Van der Veer met
with President Putin on Tuesday but would not
comment on the outcome as reported in the
Russian media. A Shell spokesperson said:
“Sakhalin II was discussed in the meeting. We
were encouraged to work with relevant
authorities in Russia (over the budget).”
The Russian Government showed its
displeasure with Shell in September when it
excluded the company from participation in a
foreign consortium developing Shtokman, a giant
gasfield in the Barents Sea and a project which
Shell was keen to join.
Also on Tuesday, Russia’s energy ministry
requested more information about the increased
spending plans at Sakhalin. “The Russian side
has question to do with poorly-grounded changes
in the spending estimate,” the ministry said,
suggesting that it might carry out an
independent audit.
Shell disclosed that Sakhalin’s budget had
doubled to $20 billion just days after signing
an asset swap agreement with Gazprom under which
the Russian state gas giant was to acquire a
quarter of Sakhalin II in exchange for a share
in a Gazprom gas asset.
The Russian Government’s embarrassment at
being left in the dark will be compounded by
concern that its expectation of revenues will be
delayed because of the huge cost increase.
The Sakhalin project is governed by a
production sharing agreement. Typically, such
agreements allow a foreign oil company to
recover its development costs from oil and gas
sales before tax and royalties are paid. Without
agreement on the new budget, Shell will have to
absorb the cost of financing the budget
increase.
