Energy Intelligence Group: Sakhalin-2 Comes Under New Pressure: “The Royal Dutch Shell-led Sakhalin-2 project on the Russian Pacific shelf has run into fresh controversy.”: Russia's Audit Chamber, a parliamentary watchdog, supported by Sakhalin deputies, has called for cancellation of the scheme's production sharing agreement (PSA) and the appointment of new investors.": Posted Wednesday 2 November 2005
Tuesday, November 1, 2005
The Royal Dutch Shell-led Sakhalin-2 project on the Russian Pacific shelf has run into fresh controversy. Russia's Audit Chamber, a parliamentary watchdog, supported by Sakhalin deputies, has called for cancellation of the scheme's production sharing agreement (PSA) and the appointment of new investors.
Under the proposal, the venture's participants -- also including Japan's Mitsui and Mitsubishi -- should be reimbursed with some $6 billion, which the Russian government could take from its oil tax-funded stabilization fund.
The main argument is that the consortium has purchased too expensive equipment from foreign suppliers, accounting for $2 billion in cost overruns.
Sakhalin Energy, the project operator, declined to comment, saying it had not received any documents from the Audit Chamber.
Observers say the new proposal may have arisen to exert pressure on the venture in negotiations about Gazprom taking a stake in the project or in discussions with the government about the increased Sakhalin-2 budget.
The energy ministry says it is considering the new project cost estimates, which nearly doubled to $20 billion, after Sakhalin Energy recently presented them for Russian approval (IOD Oct.19,p9).
Insiders say Moscow will push for the sum to be lowered. Under the terms of the Sakhalin-2 PSA, all costs can be recovered before the state starts receiving its share -- meaning the higher the costs, the longer Moscow must wait.
The revised budget will be analyzed by state experts to see if the increase is justified. The industry and energy ministry is also hiring an independent organization to study cost overruns.
In its defense, Shell points at other big offshore developments, including the Exxon Mobil-operated Sakhalin-1 project and Statoil's Snohvit gas field in the Barents Sea.
Sakhalin-1's budget stands at $14 billion, up from the original $ 12 billion, while the $9.2 billion Snohvit development is now nearly 50% over budget (see p1). Some experts say Shell should just insist that the
Sakhalin-2 budget represents the cost of developing Russia's frontier reserves.
Nelli Sharushkina, Moscow
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