Royal Dutch Shell Group .com Rotating Header Image

SAKHALIN2: How many billions of dollars did Shell lose in Russian annexation?

Chris Finlayson representing Shell and Alexander Medvedev, Gazprom’s Vice Chairman

By John Donovan

Royal Dutch Shell executive Chris Finlayson held a leadership position in Shell’s Sakhalin II project in Russia from September 2005 to September 2009.

The venture was described as “the Mother of all Projects” by the Financial Times.

When Finlayson joined the Sakhalin II project, Shell was the controlling stakeholder in the venture.

By the time he departed, Shell had lost its controlling stake and had become a junior partner in humiliating circumstances.

The Putin government found out that Shell had hidden information from them in a high level cover-up. As a Russian government minister, Oleg Mitvol, confirmed to the news media at the time, and more recently in a GERMAN TV documentary segment broadcast across Europe, I supplied that crucial insider information to him. I did so before the real nature of Putin had become apparent.  

VIDEO INCLUDES INTERVIEW WITH OLEG MITVOL – THE SO-CALLED “KREMLIN ATTACK DOG” 

 

Shell undoubtedly lost many billions of dollars as a result of the Russian annexation of Sakhalin2. Shell has never disclosed the overall figure, though some definite losses have emerged. Data that would enable the overall figure to be calculated lies somewhere in the information and evidence contained within this article and links.

Finlayson played the key role in a subsequent negotiation with Gazprom that went disastrously wrong for Shell.

Finlayson lamely tried to explain to the host government why projected budget costs had doubled. Progress had also been hit by production delays. He made promises that were not met, demands which backfired, and eventually lost the battle over control of the project. Not an inspiring record and totally at variance with boasting in a BG Group press release (before he lost that job) about Finlayson “managing” Gazproms entry into the Sakhalin II project as a joint venture partner. It was actually a case of mismanagement ending in abject surrender and humiliation.

There was further embarrassment and a drop in the value of Shell ‘A’ shares when what was meant to be a secret protocol covering a $3.6bn additional cost to the original partners, was leaked by the Russians. (1) (2) (3) (4) (5)

When Finlayson commenced the negotiations as Chairman of Sakhalin Energy, Royal Dutch Shell had a 55% stake as the operator. Japan’s Mitsui & Co Ltd had a 25% stake, and Mitsubishi Corp 20%. At a result of Shell’s surrender, Gazprom acquired a controlling stake in the project in December 2006. The stakes of the original partners, Royal Dutch Shell, Mitsui and Mitsubishi, halved to 27.5%, 12.5% and 10% respectively. In short, Shell lost control and became a minority partner. The Russians had acquired a majority stake at a bargain price.

CHRIS FINLAYSON CONFIDENTIAL INTELLIGENCE BRIEFING TO THE U.S. GOVERNMENT

WikiLeaks provides us with an account of what actually happened in December 2006. It comes mainly from Chris Finlayson himself in a briefing he gave to the then U.S. ambassador in Moscow on 14 December.

Shell’s negotiations with Gazprom (controlled by the Putin regime) were deemed important enough to be the sole subject of a classified confidential cable sent in December 2006 by the U.S. Embassy in Moscow to senior people at multiple U.S. government destinations, including the U.S. National Security Council and U.S. Departments of Defense, Energy, and Commerce. One recipient for example, was Tracy McKibben, Senior Director for European Affairs at the National Security Council. No doubt the Americans were concerned about potential ramifications for the ExxonMobil Sakhalin I project.

The subject heading of the confidential cable was “RUSSIAN ENERGY: AMBASSADOR MEETS WITH SHELL ON SAKHALIN-2”

Extracts

Finlayson said that up until December 13 the negotiations regarding Gazprom’s entry into Sakhalin-2 project had been progressing well

At a meeting on December 13, Alexander Medvedev, Gazprom’s Vice Chairman and negotiator on the Sakhalin-2 project, informed Finlayson that Gazprom’s Chairman Alexey Miller had examined the file on the environmental accusations made against SE by Oleg Mitvol, deputy head of the Ministry of Natural Resources’ environmental watchdog agency, Rosprirodnadzor. Miller concluded that the environmental damages — $10 billion worth — should be factored into the negotiations. As a result, Medvedev said that Gazprom was willing to offer only $2.6 billion for the 50 percent stake. Finlayson said this was a “silly” offer significantly below earlier offers and that it was not within his remit to even discuss such a low figure. These comments track with what the Ambassador was told by the U.K. Ambassador Anthony Brenton (please protect), who said that press coverage of the negotiations did not accurately reflect the difficulties the two sides were having coming to closure.

In a separate conversation with the Ambassador, Japanese Ambassador to Russia Yasuo Saito (please protect) said that there is a good chance that the Japanese companies, by contrast with Shell, would cave-in to Gazprom’s demands because they are under a lot of pressure in Japan to deliver the gas. Finlayson said that there “very likely” will be further production delays as a result of these negotiations and the recent removal of water use licenses on some stretches of the gas pipeline on Sakhalin Island and affecting drilling permits.

Finlayson said that it was hard to tell where this issue would go from here and how much of this was negotiating bluff on the part of Gazprom.

Cable Extracts End

CONTRARY TO THE FINLAYSON BLUSTER, SHELL CAVES IN

As is evident from his account, the whole negotiating situation changed when out-of-the-blue, Medvedev raised the subject of a file of “accusations” supplied to him by a Russian Environmental Minister, Oleg Mitvol. This was the pivotal card played by the Russians at that late stage in the negotiations, not the doubling in project costs.

Finlayson claimed in March 2006 that Shell had sent “truckloads” of documents to the Russian agency investigating the cost overrun…” Unless they fell off in transit, Shell neglected to supply the documents in the Mitvol file, which were not accusations, but incriminating authentic Shell/SEIC internal documents and communications. Information later described by the Senior Correspondent of The Petroleum Economist, after he had scrutinized the documents, as “detailed material about Shell’s ecological abuses on Sakhalin: a catalogue of corner-cutting, mismanagement and efforts to cover up damaging evidence.”

Shell’s negotiating position and integrity was severely damaged.  Contrary to the Finlayson bluster, Shell caved in to the alleged bluffing by Gazprom. It had been forced on the back foot by the evidence in the file and within days endured a humiliating capitulation with a consequential dramatic impact on Shell. (1) (2) (3) (4) (5)

The New York Times reported on the extraordinary outcome: Energy giants cede Putin control with a thank you

First two paragraphs

INSIDE the Kremlin last week, the executives of three big international companies – Royal Dutch Shell, Mitsubishi and Mitsui – heaped praise on the man whose government had forced them to cede control of the world’s largest combined oil and natural gas project.

“Thank you very much for your support,” Shell’s chief executive, Jeroen van der Veer, told the President, Vladimir Putin. The meeting ended a six-month regulatory assault on the project, Sakhalin II, but only after the companies surrendered control of it to the state energy giant, Gazprom.

As I pointed out at the time, Shell’s sycophantic praising of Putin was analogous to the victim of a prolonged ruthless assault thanking the mugger who had coshed him senseless and stolen his valuables.

Finlayson had said only weeks earlier that “Shell was “very much looking forward to welcoming Gazprom to the project as a leading shareholder…“. Due to this astonishing turn of events, Gazprom had taken control, with Shell relegated to minority status. Gazprom had expected to make $50bn from Sakhalin II. Now it would make double that and much more, all at the expense of Shell and the other original partners.

WHERE DID THE DEVASTATING EVIDENCE COME FROM?

Mitvol confirmed in news media interviews at the time (1) (2) that I was the person who supplied him with the damaging evidence (Shell internal documents) proving that Shell/Sakhalin II senior management had not disclosed internal warnings about environmental violations.

EXTRACT FROM ARGUS FSU Energy

INTERVIEW WITH OLEG MITVOL

Q: Who will take Sakhalin Energy to court?

A: I will take them. I have documents proving that the Sakhalin Energy management was aware that the company violated technical standards, but carried on trying to meet project deadlines and refused to stop work. I am confident of winning my case in Stockholm.

Q: What documents are these? Where are they from?

A: I have email correspondence between executives in Sakhalin Energy management from 2002. I received these letters from John Donovan, owner of the anti-Shell website www.royaldutchshellplc.com. I received them on 19 October and forwarded them to Sakhalin Energy with a request for an official reply. But I have not received any reply so far. I presume that they are in shock.

Q: How could you prove that these documents are genuine?

A: They appear genuine and we have special services working to prove this. Once they have been verified, we will have enough evidence to take Sakhalin Energy to court. If we win, the Sakhalin 2 consortium should pay compensation for all the environmental damages – which will come to over $10bn – as well as compensation to the state for loss of revenues caused by the additional delays.

Mitvol confirmed again in a TV documentary feature aired across Europe and North America earlier this year that I was the source of the evidence in his file. The Russian government previously had suspicions, but no evidence.

I had regularly passed Shell/Sakhalin II insider documents to Oleg Mitvol until literally days before the crucial meeting between Finlayson and Alexander Medvedev.

PLEDGES OF TRANSPARENCY MADE BY CHRIS FINLAYSON

The withholding from the host government of materially important information (the cover-up) was directly at odds with pledges of transparency made by Finlayson.

(Extract from “Shell’s activity barbaric, says Russia”: Gulf Times 29 September 2006)

Asked about Shell’s environmental record, the company’s top executive in Russia told Reuters Sakhalin-2 was a “world class project with a unique degree of transparency”. “We have nothing to hide and nothing to be ashamed of on Sakhalin,” Chris Finlayson, president of Shell Exploration and Production Russia, said.

It is also impossible to reconcile his pledge of transparency with the content of the following articles, all concerning events that took place while Finlayson was in the leadership position at Sakhalin Energy.

The Observer: Shell comes under fire for role in Sakhalin audit: 31 August 2008

BusinessGreen.com: Shell accused of manipulating environmental report: 1 September 2008

Environmental Leader: Shell Criticized for Manipulating Environmental Audit Report: 2 September 2008

in 2008, the WWF supplied Sakhalin II related evidence to a House of Commons Select Committee. It included reference to the insider information leaked to me including Sakhalin-2 whistleblower warnings which proved 100% correct.

THE MAN WHO BROUGHT SAKHALIN TO A HEAD

On 12 December 2006, I received an email from Derek Brower, Senior Correspondent (and now editor-at-large) of The Petroleum Economist magazine. Derek asked:

“I was wondering if you’d be available to do an interview at some point. We’re curious to find out about the man who brought Sakhalin to a head!”

See subsequent article published in Prospect Magazine: How two men and a website in Colchester humbled one of the oil industry giants

Extract

What most astonished Shell was the detailed inside knowledge Mitvol had accumulated about the company’s abuses. Some in the company suspected industrial espionage. But it was actually information that the Donovans of Colchester were passing to Mitvol. The two men had received detailed material about Shell’s ecological abuses on Sakhalin: a catalogue of corner-cutting, mismanagement and efforts to cover up damaging evidence. They say they got this information from Shell insiders. Mitvol clearly trusted the material, and in December he admitted for the first time publicly that his deep throat on Sakhalin was John Donovan.

EVIDENCE OF SHELL’S INTENT TO KILL A RELATED SUNDAY TIMES ARTICLE

Our involvement in these seismic events via contact with The Kremlin, Mitvols office and a Rosprirodnadzor agent in London, also attracted the attention of The Sunday Times who decided to publish a story about our battles with Shell and our involvement in the Sakhalin II project. Their reporter Steven Swinford interviewed me and Oleg Mitvol who, as usual, was forthright in his comments about Shell. Swinford read the half page article over to me at 11am on 3rd February 2007. It was to be printed that afternoon for publication the next morning. It described our involvement in the Sakhalin-2 project as “The Ultimate Revenge” and said that our intervention had cost Shell £11 billion. Bloomberg had already estimated a 4 percent reduction in Shell’s oil and gas reserves as a consequence of the Sakhalin debacle. The Sunday Times article contained quotes from Swinford’s interview with Oleg Mitvol, including Mitvol expressing his surprise at the lack of a fight put up by Shell and their meek surrender of control.

Without any credible explanation, the article was not published the following day and was never published.

We were left baffled until we decided to seek Shell internal documents about us by making a SAR application to Shell under the UK Data Protection Act. When we received the internal Shell communications about us, we discovered that Shell had been very closely monitoring our activities. Most surprising of all, a Shell internal communication dated 2 February 2007 revealed Shell’s wish to kill The Sunday Times story by trying to persuade The Sunday Times that it was “old news”. They actually used the term: “kill the story.”

Shell’s continued concern was evident from a further internal email the following day, 3 February. By coincidence or otherwise, the article was killed that very day. A short time later, The Sunday Times published a spectacular colour advertorial promoting the Shell Ferrari partnership.

The Sunday Times did publish a half page article about us by Danny Fortson in July 2009, naturally noticed by Shell, which made passing reference to the billions in lost revenues to Shell arising from our Sakhalin intervention. Other articles, including a half page in The Guardian, made the same point.

THE FINANCIAL IMPACT ON SHELL ARISING FROM THE SAKHALIN DEBACLE

The £11bn calculation was made by The Sunday Times after checking financial information published by Shell. The losses subsequently became even clearer.

In the RDS Annual Report 2007, Shell declared: “The main impact on the Consolidated Balance Sheet was a decrease of $15.7 billion in property, plant and equipment and $6.7 billion in minority interest
” This was partly offset by an increase of $3.7 billion under equity accounted investments. This means there was a loss of over $18 billion under those headings alone.

Extract from Royal Dutch Shell Annual Report and Form 20-F 2007 – 28 Minority interest

“In April 2007, Shell sold half of its interest in Sakhalin II, reducing its interest from 55% to 27.5%, for a sales price of $4.1 billion. As a result of this transaction, Sakhalin II has been accounted for as an associated company rather than as a subsidiary with effect from April 2007. The main impact on the Consolidated Balance Sheet was a decrease of $15.7 billion in property, plant and equipment and $6.7 billion in minority interest, and an increase in investments: equity-accounted investments of $3.7 billion.”

The Boston Globe estimated in an article published on 23 August 2008 that Shell had lost up to $9.6bn from the downsizing of its share in the project.

We then have to add the reduction of proven reserves. Shell admitted in the same Annual Report (2007) a loss of “402 million boe of proven reserves” arising from the same transaction.

Extract from Royal Dutch Shell Plc Annual Report and Form 20-F 2007 – Reserves

An article published in The Observer newspaper on 16 March 2008 estimated the loss was actually 1.1 billion boe. Colossal sums are generated whichever figure for lost “proven reserves” is used in the calculation.

Suffice it to say that Shell lost many tens of billions of dollars as a result of information I passed to the Russians from Shell/SEIC insiders during the period when Chris Finlayson was responsible for the corrupt shambolic Sakhalin II project in Russia.

GENERAL DAVID GREER

Our unusual involvement in the Sakhalin project continued.

In June 2007, an insider supplied me with an extraordinary motivational message with a military tone circulated to Sakhalin II workers by the Deputy Chairman/Project Director of Sakhalin Energy, Mr. David Greer. It resulted in the resignation of Greer after I passed it to the Financial Times, triggering several articles and an FT Poll, when it became apparent that the most inspiring part of the memo had been plagiarized from a war time speech by General George Patton.

Extracts from the FT article ‘Pipeliners All!’ Shell’s memo to Sakhalin (See link to full article below)

In a leaked email from David Greer, the deputy chief executive of Sakhalin Energy Investment Company, the consortium running the Sakhalin 2 project, he reveals that he despises cowards and urges his staff to “Lead me, follow me, or get out of my way”.

After the good news, though, the mood darkens. “However, some of the comments and body language witnessed at the Bi-annual Challenge meeting do suggest that PDP is running the risk of becoming a team that doesn’t want to fight and lacks confidence in its own ability. Surely, this is not the case?”

Personally, I, like most others, love winning. I despise cowards and play to win all of the time. This is what I expect of each and everyone of you…”

It was clear from the content of the email that the workforce under the leadership of Chris Finlayson and his subordinate, David Greer, was thoroughly demoralized.

‘Pipeliners All! Shell’s memo to Sakhalin

Shell’s team in ‘hell’ feels the heat

Shell man’s motivational memo is straight from the Patton script

Motivational memos must make their message clear

Memo writer in the Shell annals

FT Online Poll on “Worst Motivational Memo”

ACCUSATIONS OF PERSONAL THREATS TO OUR INSIDER SOURCES

In July 2007, we received an allegation from a former Sakahalin II worker naming “Craig, Ruddock and Finlayson”.

Extract

“I can confirm the views of Simon and Lucio. I was kicked out of SEIC and have since been the victim of uninterrupted personal threats and attacks by Craig, Ruddock and Finlayson’s police in an attempt to silence me from telling you the whole truth about Sakhalin 2 budget and schedule. It is only the fear of losing my freedom and livelihood that prevents me from telling you more”.

One of our prime Sakhalin insider sources cut off the flow of information because of threats being made. 

MORE EVIDENCE

WWF Evidence submitted in 2008 to House of Commons Select Committee quoting from a John Donovan Sakhalin II article published on royaldutchshellplc.com

(1): The UNITED KINGDOM PARLIAMENT Hansard Archives Research Uncorrected Evidence: 20 June 2008

(2): Memorandum submitted by WWF to inquiry by House of Commons Select Committee: Quotes Sakhalin II corruption allegations from royaldutchshellplc.com article: 20 June 2008

(3): House of Commons Environmental Audit – Minutes of Evidence ordered by the House of Commons to be printed 14 October 2008 (RELATED LINK IS IMMEDIATELY BELOW)

(4) www.parliament.uk: Evidence submitted by WWF to Select Committee on Environmental Audit: Evidence submitted 20 June 2008: (SAKHALIN II BACKGROUND INFORMATION: — Allegations have been made by a whistleblower of inappropriate relationships between SEIC management and its contractors, in particular Starstroi and its subcontractor SU4.[22])

Backup webpages 1, 2, 3, 4

HOUSE OF COMMONS EVIDENCE ENDS

Boston Globe: The Russian power play on oil, natural gas reserves: 23 August 2008

(In one of the most blatant instances, Shell Oil was forced to yield control of its operations off Sakhalin Island in exchange for a payment of $7.4 billion from state-dominated Gazprom. Most outside analysts estimate that Shell’s share was worth $15 billion to $17 billion.)

The Observer: Shell comes under fire for role in Sakhalin audit: 31 August 2008

BusinessGreen.com: Shell accused of manipulating environmental report: 1 September 2008

Environmental Leader: Shell Criticized for Manipulating Environmental Audit Report: 2 September 2008

Ethical Corporation: Shell’s Sakhalin influence: October 2008

DAVID GREER AFFAIR

ft.com: ‘Pipeliners All!’ Shell’s memo to Sakhalin: Published: June 5 2007 22:29 | Last updated: June 6 2007 13:07

As if laying pipelines across Sakhalin Island, described by Chekhov as “hell”, were not enough, the engineers battling the elements there have to put up with their boss’s motivational memos.

In a leaked email from David Greer, the deputy chief executive of Sakhalin Energy Investment Company, the consortium running the Sakhalin 2 project, he reveals that he despises cowards and urges his staff to “Lead me, follow me, or get out of my way”.

Much of the memo appears to have been drawn from a speech by General George S. Patton to US troops ahead of the D-Day invasion, when he said: “When you were kids, you all admired the champion marble player; the fastest runner; the big league ball players; the toughest boxers. Americans love a winner and will not tolerate a loser. Americans despise cowards. Americans play to win – all the time.”

The Patton link was noted in a posting to an FT.com forum by Mark Bisset.

Sakhalin 2 has had a troubled history, hit by rising costs and concerns about its environmental impact.

In a deal completed in April, Royal Dutch Shell and its Japanese partners were forced to allow Gazprom, Russia’s state-controlled gas company, to buy a majority stake.

Mr Greer’s e-mail reveals the pressure the company is under to hit its schedule of delivering its first shipments of liquefied natural gas by the second half of next year and the unusual management techniques he is using.

“Pipeliners All! Many thanks to all of you for your contributions to this week’s Bi-Annual Challenge … and what a Challenge it is going to be for all of us!” the e-mail begins, cheerily enough.

“From the outset, I want to assure you that, despite the mutterings on the day and the challenges ahead, I have total faith in you and our collective ability to complete the task ahead of us.”

After the good news, though, the mood darkens. “However, some of the comments and body language witnessed at the Bi-annual Challenge meeting do suggest that PDP is running the risk of becoming a team that doesn’t want to fight and lacks confidence in its own ability. Surely, this is not the case? Pipeliners and Engineers love to fight and win, traditionally. All real engineers love the sting and clash of challenge.”

After more appeals to the pride of “real frontier professionals” comes the inspirational bit. “When everyone of you were kids, I am sure that you all admired the champion marble player, the fastest runner, the toughest boxer, the big league football players. Personally, I, like most others, love winning. I despise cowards and play to win all of the time. This is what I expect of each and everyone of you…”

“Strive to be proud and confident in yourselves, be proud of your tremendous pipeline achievements to date and lift up your level of personal and team energy to show everyone that you are a winning team capable to achieving this year’s goals. If you can crack this angle, I am very confident you can crack the job, with ease.

“So Lead me, Follow me or Get out of my way; Success is how we bounce when we are on the bottom.”

The memo was leaked to the website www.royaldutchshellplc.com, which has long been a thorn in Shell’s side.

Shell confirmed the e-mail was genuine but was reluctant to discuss it further.

Copyright The Financial Times Limited 2010.

Shell shakedown: Fortune’s Abrahm Lustgarten reports how the world’s second-largest oil company lost control of its $22 billion project on Russia’s Sakhalin Island. February 1 2007: 12:10 PM EST

Extracts

The news was stunning, even if rumors had been flying: Shell (Charts) was halving its ownership in the $22 billion project, cutting its stake from 55% to 27.5%, and Gazprom, the Russian gas giant, was stepping in, buying Shell’s share plus half the stakes owned by Japanese partners Mitsui and Mitsubishi, for just $7.5 billion – the equivalent, says a Shell spokesman, of “paying to enter on the ground floor, as if they were a shareholder at the beginning.” The foreign companies also agreed to absorb $3.6 billion of the project’s mounting cost overruns.

That Shell and its partners were victims of an unscrupulous campaign by the Russians to win leverage at the negotiating table is certainly true. The company’s loss of its controlling interest in what chief executive Jeroen van der Veer called a “key part of Shell’s upstream strategy,” amounting to an estimated 5 percent of its global reserves, is largely a story about the high risks of frontier international energy projects. But it is also a tale of how Shell misplayed a strong hand and, after 12 years of work, lost untold billions of dollars in future earnings.

BACK-UP COPY OF FORTUNE ARTICLE 1 FEB 2007

 

Comments are closed.

%d bloggers like this: