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Shell takes it on the chin, repeatedly Leaked internal report on big project management comes after Russian government, and Putin himself, questions Sakhalin costs Allen Baker Petroleum News Contributing Writer
Shell’s management of the Sakhalin 2 project in the Russian Far East has taken yet another blow, as England’s Financial Times reported Nov. 6 that a confidential analysis prepared for the company showed major problems with management of large projects. Well, it was supposed to be confidential.
Consultant Ed Merrow of Independent Project Analysis, said that Shell relied too much on outside contractors and that its ability to manage large projects, once in the top tier, had slipped to the industry average. Merrow evaluated 13 projects, including Sakhalin 2.
Shell executives were already aware of the problem, and announced in October the hiring of a thousand new technical workers to improve project management, as well as a “project academy” to help executives improve. But still, it’s a black eye for Shell at a critical time. Putin, top Shell execs meet The news of the management critique came just days after Russian President Vladimir Putin met with top Shell executives on a state visit to the Netherlands and reportedly told them the huge cost increase on the Sakhalin project — a doubling to $20 billion — wasn’t going to be accepted by the Russian government.
Russia’s Kommersant newspaper quoted sources at the meeting of Shell executives and Russia’s leader as saying Putin spent half an hour criticizing management of the Sakhalin project at the Nov. 1 meeting.
Shell confirmed that “Sakhalin 2 was discussed in the meeting with President Putin. We were encouraged to work with the relevant authorities, as we are doing, and to continue with the due process.” Heat is on Relevant authorities, as the company puts it, have been turning up the heat. And since the cost of Sakhalin development directly affects Russian revenues, the issue could get a lot stickier. Under the production-sharing agreement, Shell gets to recoup its costs before the government starts collecting anything beyond basic royalties. So Russia has a say in the budget process.
“The Russian side has questions to do with poorly grounded changes in the spending estimates,” the Russian Energy Ministry said in a statement early this month.
Another Russian agency, the Audit Chamber of the Russian Federation, wants to reconsider the conditions of the agreement with the Shell consortium, according to an Oct. 31 report in Vedomosti, and tear up the agreement if changes aren’t made. If let stand, the agency indicated, it would cost the Russian treasury $2.6 billion or more. Gazprom adjustment? All this puts a whole different light on the deal Shell reached with state-controlled Gazprom just before the cost overrun bombshell exploded. Under that agreement, Gazprom will take a 25 percent stake in Sakhalin 2 and Shell gets a stake in a huge Russian gas field. But the pact included an adjustment after in-depth studies, so Gazprom now has some major leverage.
Shell, after selling 25 percent to Gazprom, will still be the biggest holder of Sakhalin Energy at 30 percent. Japan’s Mitsui has 25 percent and Mitsubishi 20 percent.
Sakhalin Energy is building a huge gas liquefaction plant, with first cargoes heading out in 2008. The startup date for the plant was pushed back eight months when the cost overruns were announced.
The project is a big one for Shell and its partners, with overall resource recovery estimated at a billion barrels of oil and 17 trillion cubic feet of gas.
At least Shell, based in the Netherlands, had a good earnings report recently, with profits of more than $9 billion for the third quarter, an increase of 68 percent from the third quarter of 2004.
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