rage over Sakhalin project" by Emerging Markets, April 19, 2004
Russian rage over
Shell's cost estimates attacked by Russian minister
By Simon Pirani /Emerging Markets
Russian Deputy Economy Minister Yuri Isaev yesterday expressed "serious
concern" about cost overruns on the Sakhalin II project in Russia's
far east and gave beleaguered Royal Dutch Shell yet another headache.
The array of objectors to the project in its present form also includes
environmental NGOs, who will meet with EBRD President Jean Lemierre
on Tuesday to air their concerns, as well as local Sakhalin politicians
and Russian companies who say too many Sakhalin contracts are going
to foreign competitors.
The project, to produce natural gas, liquefy it and export it to Asia-Pacific
markets, is being developed under a production sharing agreement with
the Russian government. It was always going to be tough to fund and,
at an estimated $10 billion, was set to be the world's largest-ever
project financing. Then two weeks ago it was widely reported that
Shell's overall estimate of costs had risen from $12 billion to $13
billion, provoking anger among Russian state officials.
"We have issues about the constantly rising costs," Isaev said in
an interview with Emerging Markets. "Obviously the cost profile will
impact on our profit.
"We will not approve any budget without being absolutely clear on
all the implications. Maybe five years ago Russian ministries may
have rubber-stamped deals without looking closely enough at them.
Now the situation has changed. We need much more information."
These issues are expected to come up at a regular meeting, scheduled
for the end of this month, between Russian federal and Sakhalin regional
officials with Sakhalin Energy, the 55% Shell-owned project company.
A Shell spokesman would not comment on specific cost figures but said
that "in a project of this size and complexity there are always unexpected
events. The Stage II budget covers an enormous level of activity even
beyond the first five years of large-scale construction." Isaev said
the Russian government would also push our partners [at Sakhalin Energy]
very hard" on the issue of the level of Russian content of construction
and other contracts.
The purchasing and sales agreement stipulates 80%, but Russian parliamentarians
and construction companies have alleged it is far lower. Fifteen Russian
companies sent a letter to President Vladimir Putin last week claiming
it was just 6%.
The political risks surrounding the project now make it crucial that
the EBRD and other multilateral institutions, who were the principal
financiers of its first stage, are brought in to the much larger second
But the EBRD has ruled that environmental impact assessments are "unfit
for purpose" and has postponed any decision on the financing until
Sakhalin Energy revises them.
Environmental campaigners see this as a window of opportunity to press
their concerns. Dmitry Lisitsyn, chairman of Sakhalin Environment
Watch, told Emerging Markets: "The project is smelling more and more
odious. Shell is producing massive amounts of documentation, but on
the ground nothing is changing. Sakhalin Energy continues to violate
a string of international standards. We believe that under these circumstances
the EBRD, with its environmental mandate, should not join the financing."