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Reuters: Russia finds Sakhalin-2 costs too high

Mon Oct 23, 2006 6:47 AM BST

MOSCOW (Reuters) – Royal Dutch Shell , Mitsui and Mitsubishi have overestimated the costs of the developing the giant Sakhalin-2 project, a Russian state-owned oil firm has found, the Vedomosti daily reported on Monday.

Russian officials were incensed by Shell’s decision last year to double Sakhalin-2’s costs to over $20 billion (10.6 billion pounds), since under the production sharing agreement (PSA) that governs it, Shell can recoup its costs before the Kremlin sees any profit.

Russia ordered state-owned Zarubezhneft to check the costs of the second stage of Sakhalin-2.

“The costs are overestimated and according to Zarubezhneft’s specialists, will amount to $17.6 billion until 2014,” Vedomosti quoted a government official familiar with the Zarubezhneft’s report.

The paper quoted a Zarubezhneft source as saying that the checks will be fully over by the end of the year when the company would present it to the Energy Ministry.

In 2001, the government and Sakhalin Energy, the operator of the project, agreed on costs of $12 billion for the project.

But last year Sakhalin-Energy raised costs for the second stage of the project to $19.2 billion until 2014. The increase drove total costs to $21.9 billion. The government once called it “the worst of the three existing PSAs”.

Russia has attracted international criticism over its assault on Sakhalin-2, the world’s biggest liquefied natural gas project and Russia’s top foreign investment.

The pressure on Sakahlin-2 is widely seen as an attempt to force Shell and its partners Mitsui <8031.T> and Mitsubishi <8058.T> to concede to less favourable terms and to boost Russian state companies’ involvement in the oil and gas sector.

Vedomosti quoted Sakhalin Energy Vice President for Corporate Affairs Igor Ignatyev as saying that the key player in the checks, Glavgosexpertiza, or the state appraisal company, had not yet finalised its work.

“The Russian side so far only has Zarubezhneft’s report, which as we heard, costs are estimated at $17.6 billion until 2014,” he said.


Sakhalin-2 is developing Piltun-Astokhskoye and Lunskoye deposits in Russia’s far east.

The deposits are estimated to contain 150 million tonnes of oil and 500 billion cubic metres of gas and are developed under a production sharing agreement where under which Shell can recoup costs from revenues before paying anything to the state.

The higher the price tag for developing Sakhalin-2, the longer Russia will have to wait longer for its share of profits.

Another source familiar with Zarubezhneft’s document was quoted as saying that the company had recommended the Russian government refuse repaying $1 billion in costs to Sakhalin Energy over a one-year delay in LNG deliveries to Asia.

Zarubezhneft also recommended the government refuse repaying Sakhalin-2 $560 million it would spend to improve the infrastructure of the local airport and $74 million in other capex.

Russia has already threatened Shell with the full armoury of sanctions at its disposal if it fails to address environmental violations at Sakhalin-2.
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