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The Wall Street Journal: Russia Plans Audit of Oil Project Due to Delays and Cost Overruns

July 21, 2006

MOSCOW — The Russian Natural Resources Ministry said Thursday that it will launch a monthlong audit of the Sakhalin-2 project, criticizing delays and cost overruns to the project that it said threaten national interests.

A statement released by Natural Resources Minister Yuri Trutnev said Sakhalin Energy Ltd., a consortium led by Royal Dutch Shell PLC, is taking longer to drill wells and start production than seen in the agreement under which the project is being developed.

“This is harming the interests of the Russian Federation, inasmuch as it defers to a later date the sharing of profit oil between the state and investors,” Mr. Trutnev said in the statement.

Mr. Trutnev said the state couldn’t hope to receive profit oil until 2014 at the earliest, partly because of Sakhalin Energy’s estimated costs doubling between 2003 and 2005. The ministry said Sakhalin Energy proposes to load its first tanker of liquefied natural gas no earlier than the third quarter of 2008, as opposed to November 2007 in its original plans. It said the consortium plans to produce 2.8 million metric tons less oil between 2006 and 2008 than it had planned.

A Sakhalin Energy spokesman said the ministry’s statement only reiterated what it itself had said about the project last year. “The ministry’s statement doesn’t contain any new information that the company hadn’t already provided,” the spokesman said. He declined to comment on why the government had chosen this moment to announce the audit.

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