The Times (UK): Sakhalin project delays may cost Shell $500m: “DELAYS at Royal Dutch Shell’s Sakhalin Energy project in Eastern Siberia could cost the company as much as $500 million (£282 million) in deferred oil revenues next year…”: “Massive cost overruns at the Dutch energy group’s largest oil and gas project were revealed last month when Shell admitted that the project’s budget had doubled to $20 billion…” Thursday 4 August 2005

By Carl Mortished , International Business Editor

DELAYS at Royal Dutch Shell’s Sakhalin Energy project in Eastern Siberia could cost the company as much as $500 million (£282 million) in deferred oil revenues next year, it emerged yesterday.

Shell said that year-round oil production off Sakhalin Island would not begin until 2007, a year later than scheduled.

Massive cost overruns at the Dutch energy group’s largest oil and gas project were revealed last month when Shell admitted that the project’s budget had doubled to $20 billion and that the first cargoes of liquefied natural gas would not be loaded until the summer of 2008, eight months later than expected.

Shell is pumping 70,000 barrels of oil per day from the Molikpaq platform, but production is possible for only half the year because the platform is ice-bound in winter, preventing offshore loading of oil. Peak oil production at Sakhalin is expected to be 155,000 barrels per day.

Delays in laying a pipeline to the shore mean that full-year output has been pushed back from next year to 2007, a Shell spokeswoman said. In addition, production from a second offshore platform, PiltunAstokhskoye-B will not be on line until 2008.

Shell yesterday denied that the rerouting of the sub-sea pipeline to avoid the feeding grounds for a rare species of whale had resulted in the oil production delays. Instead, it attributed the hold-ups to the pressure of operating in the difficult sub-Arctic environment.

Sakhalin’s oil — known in the trade as Vityaz crude — is valuable because of its proximity to Japanese markets and tends to fetch a $5 to $10 premium to the price of Gulf blends.

Unlike gas, which cannot be sold without major infrastructure development, oil has an instant value and can be sold immediately. Therefore, when energy companies develop gasfields that contain oil they seek to bring oil into production at an early stage, hoping to generate rapid revenues that help to mitigate the cash cost of development.

Shell declined to estimate the quantity of oil revenue that would be deferred by the delays.

However, if one assumes that Shell’s Vityaz crude could fetch $40 per barrel, a discount of a third to the Brent crude price, and Shell is forgoing 70,000 bpd for 180 days (the difference between full and half-year production) the theoretical loss of income is $504 million.

Shell said yesterday that it still expected to meet its target of between 3.5 million and 3.8 million barrels per day for 2005 and 2006.

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