Russia stands to make at least $50 billion from Sakhalin 2: Shell

London (Platts)--23Nov2006

Russia stands to make at least $50 billion from the Shell-led Sakhalin 2
project despite its well-documented environmental and budget-related problems,
the head of Shell Russia said Thursday.
Speaking at a meeting of industrialists from the European Union and
Russia in Helsinki, Shell Russia Chairman Chris Finlayson said there had been
a lot of talk about whether the Sakhalin 2 project was fair to Russia.
"We believe that even with the cost increases in the project, it does
remain highly beneficial for Russia. Even at an oil price as low as $34/barrel
the project would generate some $50 billion in revenues to Russia over its
lifetime. Through cash payments and benefits in kind, this will of course be
much higher at current or higher prices," he said.
"Even today, Russia gets benefits which by now have exceeded over half a
billion dollars in bonus payments, royalties and taxes," he said.
Sakhalin 2, being developed under a production-sharing agreement, has
been at odds with the Russian government since last year, when Shell announced
an increase in the project's budget to $20 billion from an initial $12
billion, reducing the government's future profit.
The government is also considering legal action against Sakhalin Energy,
the project's operating consortium, which is owned by Shell, Mitsui and
Mitsubishi, over alleged environmental damage.
Finlayson spoke of Russia's chairmanship this summer of the G8 summit in
St Petersburg where world leaders discussed the challenge of delivering the
energy that the world needs to continue economic growth.

SECURITY OF DEMAND
For many years Western Europe has looked at energy security from the
buyer's point of view, making sure that energy would be available when and
where the buyer needs it, the Shell executive said.
Today that situation is changing and Russia is making it clear that it
needs long-term commitments from buyers. This security of demand is needed to
allow companies to make the necessary investment in projects and
infrastructure needed to ensure supply, he added.
"Such inter-dependency of supplier and consumer has, for instance, been
the basis for the astonishing growth of the LNG industry over the past four
decades and today in that industry Shell has its own stake in security of
demand for Russian hydrocarbons," Finlayson told delegates at the meeting.
Four years ago, Shell "moved quickly" to a final investment decision on
Sakhalin 2 because, Finlayson said, it could see that its LNG would "fit
ideally" into the widening gap in the Asia-Pacific market.
All of the LNG to be produced by this project has been already been sold
on long-term contracts to customers in Japan, South Korea and North America.
"Such commitments from buyers have been obtained almost two years before
the first LNG shipment is planned, in the summer of 2008. And this will be the
first Russian gas to be delivered to these markets of Asia and the US West
Coast. This development is important not just for Japan, not just for the
Asia-Pacific basin, but also for Europe," he said
Japan is relying on Sakhalin for 10% of its total gas supply by the year
2010. Any delay to this major project will not only affect Japan and the
Pacific basin, but will also affect Europe as customers will seek alternative
supplies from other areas, he said.

NEED FOR MUTUAL TRUST
Another G8 theme that is "particularly important" for Shell is the mutual
dependency or reciprocity of investments, as Russian President Vladimir Putin
recently described it. Investment must be a "two-way street," Finlayson said,
and real stability and security can come only with mutual trust, dependency
and shared long-term objectives.
"Just looking at this year, Gazprom has signed a swap deal with Wingas,
entered the UK gas retail market and reached an agreement with Gasunie on the
North European gas pipeline. Elsewhere, Lukoil and ConocoPhillips continue to
expand their successful partnerships. These examples show that Russia and
Russian business are welcome in western markets, despite controversial
coverage of some potential deals," he said.
"The bottom line is that we need to work on the basis of a common
interest perspective and recognize that Russia and the EU both have a mutual
interest in building and widening inter-dependency," he said.
At the same time Shell would like to hear clear signals that
international companies continue to be welcomed in Russia and that both the
Russian government and Russian business see them as valued partners who can
contribute to the successful development of the industry, he added.
"Obviously, no mutual relationship can survive without trust," he said.
Sakhalin 2 "should also pave the way for other long-term projects
involving large-scale oil and gas suppliers from the Russian Far East to many
customers in that part of the world," Finlayson said, adding that Shell was
"very much looking forward to welcoming Gazprom to the project as a leading
shareholder, further emphasizing the inter-dependency" of which he had spoken.
Gazprom had been negotiating the purchase of a 25% stake in Sakhalin 2
last year as part of an asset swap with Shell, but the deal was put on ice
after the huge jump in the project's costs was revealed.
--Claire-Louise Isted, claire-louise_isted@platts.com

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