Royal Dutch Shell Group .com Rotating Header Image

Daily Telegraph: Russia turns the screw on Royal Dutch Shell

By Christopher Hope, Industry Editor
(Filed: 19/09/2006)

Shell moved last night to reassure its investors after Russia tried to stop the development of its biggest gas project, the $20bn (£10.6bn) Sakhalin II scheme in eastern Siberia. The move by the Putin administration was seen by some as an attempt to tighten the Kremlin’s grip on the country’s energy resources after the part re-nationalisation of oil company Yukos.

Russia’s natural resources ministry said in a statement yesterday that it had asked the country’s oil and gas development agency to cancel Shell’s environmental licence. Without a licence it cannot produce hydrocarbons. Shell, which owns 55pc of Sakhalin II, is already trying to persuade the Kremlin to agree to cost over-runs, which have seen the budget jump from $10bn to $20bn.

Part of the deal involves handing a 25pc stake to Gazprom, the state-controlled gas giant. Initially this will come from Shell, although Mitsui (25pc) and Mitsubishi (20pc) will also dilute their stakes. Analysts said that one way of pressuring Shell was to question parts of the production sharing agreement under which Russia and the Sakhalin shareholders will share profits.

Shell is now faced with reapplying for its environmental licence, a process which may delay the project for six months. A spokesman for Sakhalin Energy insisted that the issues raised by Moscow were “not material”. He said: “All concerns are being addressed expeditiously in co-operation with the relevant authorities and do not constitute any legal grounds for nullification.”

Any attempt to stop the project, by revoking the environmental licence – or Order 600 – “could be damaging for the project and for Russia and lead to delays in project development”. Extra costs would be met by Russia and the Sakhalin shareholders under the terms of one of only three production sharing agreements (PSAs) in Russia. The Sakhalin Energy spokesman said: “We have no doubts that the government of the Russian Federation will honour its obligations under the PSA, and thereby ensure that Russia meets its commitments to provide energy securely to its customers. We will continue to work with the Russian authorities to resolve the issue and thereby maintain confidence of international customers in Japan, Korea and North America, where Sakhalin gas is contracted for supply in 2008.”

Analysts said that the move was linked to the talks about the cost over-runs which are likely to result in state-controlled Gazprom taking a 25pc stake in Sakhalin II. One analyst in London described the move as “sabre-rattling”. Shell’s shares closed up 10 at £17.93. There were also suggestions from the Interfax news agency that Russia might revoke the operating permits for Exxon Mobil and Total on the sister project Sakhalin I.

In a separate development, Exxon, which owns 30pc of Sakhalin I according to an agreement struck in 1996, announced that the development costs had jumped by 33pc from $12.8bn to £17bn because of soaring steel costs. The first oil was pumped last October. An Exxon spokesman blamed the cost hike on the cost of “construction components and unfavourable foreign exchange rates”.

Separately, Gazprom was reported by Russian newspapers to be in talks to buy 50pc of TNK-BP from the Russian venture’s three shareholders. BP declined to comment, however analysts pointed out that any sale would have to take place after the end of next year, which is when a lock-in agreement expires. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

Comments are closed.

%d bloggers like this: