Shell gas project €8bn over budget
Oil giant Shell revealed today that one of its flagship gas projects had shot $10bn (€8.3bn) over budget in just two years.
Shell blamed currency swings and rising prices of commodities such as steel for driving up the cost of the Sakhalin II, which will help satisfy the thirst for energy in Asia with gas found off Russia’s eastern coast.
It told investors that its Sakhalin II joint venture was now expected to cost $20bn (€16.5bn) – double the estimates when it agreed to back the project financially in 2003.
In a further blow, Shell pushed back the date of the first deliveries of liquefied natural gas (LNG) from Sakhalin II to the summer of 2008 from November of the previous year.
The news will weaken confidence in the project from investors who have become alarmed at the tougher stance of the Russian government against oil firms and criticism from local communities and environmentalists.
Shell said its global investment programme, including Sakhalin II, would be reviewed later this year but it stuck by previous guidance that it will spend $15bn (€12.4bn) on infrastructure in 2005.
It is understood that the budget for Sakhalin II is also being squeezed by inflationary pressures in Russia and other external factors such as the cost of hiring contractors.
Sakhalin II is a key project in Shell’s exploration strategy as it seeks new sources of oil and gas to replace reserves lost in recent years. It is estimated that one billion barrels of oil can be recovered as well as 17.3 trillion cubic feet of gas.
Shell is the majority shareholder of the Sakhalin Energy Investment Company (SEIC) which is responsible for constructing the gas facility on the island.
It currently owns 55% of SEIC but signed a memorandum of understanding with Russian gas giant Gazprom this month to swap 25% of shares for half of a Siberian field.
The remaining shares in SEIC are held by Japanese firms Mitsui, which owns 25% of the company, and Mitsubishi with 20%.
Malcolm Brinded, head of exploration and production, said Shell was taking “immediate action” to address the issues.
He said: “We are consulting and discussing with appropriate stakeholders to enable this critical and challenging frontier project to come to an acceptable completion.
“The exploration and production executive team, and the SEIC management, always recognised the massive challenges of this project.
“We are committed to deliver the project – and to deliver value to shareholders and to Russia.”
Sakhalin II is the second phase in a project that began in 1996 and saw the first oil produced three years later. It involves the construction of offshore platforms and pipelines to a new LNG plant and export terminals on the island.
The project has been sharply criticised by environmentalists for potential damage to rare species on the island as well as local communities.
Sakhalin island is home to more than 1,400 flowering plants, conifers and ferns and over 350 species of birds, including more than 100 listed rare species.
But the biggest fear is that construction will endanger the world’s 100 remaining grey whales who use the north of the island as a feeding ground.
At Shell’s annual meeting last month, environmentalists and representatives from Sakhalin joined together to air their grievances to the board.
