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Prime-Tass: Public spending watchdog wants govt to “streamline” Sakhalin-2 costs

MOSCOW, Oct 10 (Prime-Tass) — The Audit Chamber, Russia’s public spending and revenue watchdog, has asked the government to consider “streamlining” the costs of Sakhalin Energy’s Sakhalin-2 oil and gas project, the watchdog said Tuesday.

The Audit Chamber said that Sakhalin Energy’s plans to increase its spending targets for 2003-2010 to U.S. $22.2 billion from $12.04 billion were unjustified. However, it did not elaborate how the project’s costs could be streamlined.

Meanwhile, last week Arkady Dvorkovich, head of the Russian president’s Expert Directorate, proposed revising the agreement. He said that if Sakhalin Energy wanted to increase its costs it should switch from its current production sharing agreement (PSA) taxation regime to the normal regime.

Under the Sakhalin-2 PSA, the government is expected to compensate for Sakhalin Energy’s costs by giving the company part of its share of oil until the project breaks even. The increase in the spending plan would reduce the government’s revenue from the project.

Earlier this month the Audit Chamber also said that Sakhalin Energy had underestimated its sales forecast for the Sakhalin-2 project’s second stage.

Sakhalin Energy based the forecast on the assumption that the oil price would initially be at $34 per barrel and rise 3% per year until 2045, the Audit Chamber said, adding that currently the price of oil is at $60 per barrel.

Additionally, the watchdog also criticized Sakhalin Energy for alleged violations of oil field development regulations.

Last month the Natural Resources Ministry cancelled the Sakhalin-2 project’s environmental approval. Oleg Mitvol, deputy director of the Federal Service for Natural Resources Oversight, said then that Sakhalin Energy would have to stop operations due to the cancellation.

The Sakhalin-2 project area is located near Sakhalin Island and has oil reserves of 150 million tonnes and gas reserves of 500 billion cubic meters.

Shell Sakhalin Holdings BV, a subsidiary of Royal Dutch/Shell, owns a 55% stake in Sakhalin Energy, while Mitsui Sakhalin Holdings, a subsidiary of Japan’s Mitsui, has a 25% stake and Diamond Gas Sakhalin, a subsidiary of Japan’s Mitsubishi, holds a 20% stake.

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