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The Times: Shell plans Qatar gas project as costs surge

By Peter Klinger
 
ROYAL DUTCH SHELL has approved a huge project in Qatar despite the budget of the gas-to-liquids (GTL) venture more than doubling to $12 billion (£6.5 billion). This comes on top of major cost overruns at the company’s Sakhalin gas and Athabasca oil-sands operations. 
 
Shell would not reveal the development cost for the Pearl GTL project, which is expected to produce three billion barrels of oil-equivalent products over its lifetime. But the Anglo-Dutch group said that the venture would cost between $4 a barrel and $6 a barrel, giving an over-the-life project cost of $12 billion to $18 billion.

When Shell first mooted Pearl, its guidance on development costs was $5 billion to $6 billion, although the size of the project has since increased.

Pearl’s construction will begin shortly, with first GTL production scheduled for 2010.

Shell has attracted heavy criticism recently after admitting that projected costs for several developments, including the massive Sakhalin oil and liquefied natural gas (LNG) venture in Siberia, had ballooned.

These cost overruns, which were blamed on complex engineering works and industry-wide cost pressures such as soaring steel and labour prices, have raised questions about Shell’s ability to develop big projects successfully.

In reference to the likely Pearl GTL cost, analysts at Merrill Lynch said that they “continue to question the quality of such investments”.

Dresdner Kleinwort, another broker, said that the increased capital requirements for the Qatar project “suggest that Shell will need an increasingly high oil price to make its target returns”. It added: “But we think high oil prices will persist, so this is value-adding.”

Peter Voser, Shell’s chief financial officer, said that Shell had adopted a policy of not revealing projected costs of significant new developments, and claimed that the action was in line with that of its peers.

Mr Voser said: “I think you can call it a new policy, that’s OK. To quote early on a project’s cost is not the right thing.”

Shell yesterday also approved development of a world-scale ethylene cracker on Bukom Island, Singapore, to produce feedstock for the chemicals industry. The two new projects are key to Shell’s strategy and shareholders will be anxiously watching progress.

Shell moved to allay concerns that it was struggling to contain inflationary cost pressures, confirming that its capital spending budgets for this year and 2007 had remained unchanged at $19 billion and $21 billion respectively.

The company also confirmed that Sakhalin’s development was “progressing in line with the [increased] 2005 schedule and budget”. The giant project is 75 per cent complete.

Shell reported a forecast-beating 36 per cent jump in second-quarter profits to $6.3 billion. The quarterly report also included a $500 million provision to cover the possible settlement of litigation stemming from its 2004 reserves scandal.

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