Sakhalin II: The Russians play hard ball with Royal Dutch Shell

international | environment | other press Wednesday September 06, 2006 22:43 by John Donovan - Royal Dutch Shell Plc .com john at shellnews dot net

Royal Dutch Shell in bear hug

The management of Royal Dutch Shell has more than met its match in the current no-holds-barred "negotiation" with the Kremlin over potential profits from the $20 billion Sakhalin II project in Russia. Little interest is being paid however by either party to the fate of the endangered Whale population.

By John Donovan

As the second largest oil company in the world, Royal Dutch Shell is used to dealing from a position of overwhelming supremacy in terms of financial clout and influence. And when it comes down to a no-holds-barred negotiation watch out, Shell management knows all the moves, legal and otherwise.

However, in Russia, Shell is up against an even more ruthless and aggressive opponent: President Vladimir Putin. Russians are renowned for their chess playing skills. We can only stand back and watch in awe the game being played out masterfully by the Russian government in respect of the Sakhalin II project, which we can all see slipping from Shell’s grasp.

The Russians were obviously outraged at the smoke and mirror tactics by Van der Veer two years, ago when he claimed that he knew nothing about the Sakhalin II costs explosion at the time of the Shell unification AGM on 28th June 2005. The following are self-explanatory extracts from a ShellNews.net article we published three weeks later, on 18 July.

"News of the latest Shell shocker – the $10 BILLION capital expenditure overrun in the Sakhalin-2 project in Russia is understandably making headlines around the globe. It is surely the biggest management oversight blunder in corporate history (if we leave the Royal Dutch/Shell reserves scandal to one side)."

"According to a report published yesterday in Mosnews, Royal Dutch/Shell CEO Jeroen van der Veer is claiming that he only learnt about this latest financial disaster last Wednesday and informed Gazprom on Thursday (*Read the article). This implies that no Shell director was aware of the £10 BILLION OVERSPEND SURPRISE at the time of the unification AGM’s on 28 June, just 20 days ago! That is simply incredible."

"No wonder that Mr Van der Veer has had to telephone the Russians at Gazprom in a panic to try to explain the dramatically changed financial landscape for the project in which they had just become partners as a result of a swap deal with Shell. Naturally Gazprom wants under the changed circumstances to renegotiate the deal. They must feel cheated and deceived. Gazprom said on Friday it considered Shell’s assets on Sakhalin-2 to be worth less after Shell doubled the project’s cost estimates to $20 billion, Reuters news agency reported. The renegotiation puts the Gazprom/Shell deal in jeopardy. That in turn puts Shell’s recovery plan in peril. "
Relevant webpage: http://shellnews.net/week28/mosnewsshellsakhalingazprom...5.htm

Putin subsequently gave Van der Veer a humiliating but well deserved roasting for the Sakhalin II cost overrun. It is interesting to note that Shell has not denied our insider information that in fact, the projected figure is now secretly put at $26 BILLION.

Did the naive Jeroen van der Veer not realise the signal he was sending out when he rolled over in submission earlier this year after President Hugo Chavez tightened his grip on Venezuela’s energy resources. Chavez followed through on his threats to punish international companies that resisted government control of the nation’s oil fields. Van der Veer threw in the corporate towel without putting up even a token defence.

Recognising that Shell management is weak and inept, the Russian government is now exploiting the cock-ups on project costs and pipeline installation to manoeuvre (strong arm) its nationalised energy company, Gazprom, into the lead partner position on Sakhalin II.

We can see the same incompetence by Shell management in Sakhalin II as we have witnessed in respect of the Corrib pipeline project in Ireland which has resulted in negative publicity for Shell on a grand scale. I almost used the word “unprecedented” before realising that in view of Shell’s track record (the reserves fraud, the Brent Bravo deaths and the admitted violence, bribery and corruption arising from Shell’s activities in Nigeria) such Shell PR disasters are becoming the norm, not the exception.

There are in fact a number of interesting parallels between Corrib and Sakhalin (including the fact that the Shell executive responsible for both debacles is Malcolm “blind eye” Brinded).

Although a construction schedule may allow for limited delays, construction project tasks tend to be inter-related, so a delay in one sub-project may have far reaching effects on other sub-projects and the progress of the project as a whole. Examples of how delays can multiply include the effects of failing to complete a sub-project within a weather window - a few days delay in completion of a sub-project on the critical path during a summer weather “window” may lead to a full year of delay to the whole project. Resources (manpower, equipment) intended for re-use on another sub-project may then not be available when required, causing yet further delays.

In the case of Corrib, Shell’s initial response was that delays to construction of a short section of the pipeline would have no effect on the overall schedule. The reality has been rather different.

Sakhalin is a little more complex, but similar considerations apply.

Does Shell have an alternative route for the pipeline which avoids mudslides (and therefore ambushes by Russian regulators)? Are they planning to move sections of the pipeline already laid? Do they have sufficient pipe available to be able to re-route the pipeline? What costs and delays would result from a need for the manufacture and delivery of additional pipe? What delays would such re-designs impose on the overall Sakhalin 2 project schedule? How much of the contractual commitments for Sakhalin LNG can Shell meet from other sources? What penalties will Shell have to pay for late/non delivery of LNG?

How much of Sakhalin will Gazprom settle for when its owners, the Russia government, has Shell management on the ropes desperate to save face and potential reserves? 33%? 50%? 75%?

I note that in all of the numerous media articles published in the last few days on this subject, no mention has been made about the fate of the Whale population potentially affected by the project. The following three paragraphs are taken from an article published by Sakhalin Environment Watch.

EXTRACTS

With a population of just around 100 Western Gray Whales remaining, and fewer than 20 breeding females, the very survival of the species is threatened. The species is classified as Critically Endangered (extremely high risk of extinction) by the IUCN (World Conservation Union).

Since Shell began oil and gas activities in the area in the late 1990s, "skinny" (undernourished)whales have been observed - which reduces the population's chance of recovery. While the cause remains unclear, any additional negative impact to the whales from the enormous expansion of Shell’s activities could push the species over the brink. Shell has proposed to build a pipeline on the seabed, directly through the whales' only known summer feeding ground, and an off-shore oil drilling platform nearby. The gray whales feed by sucking up sediment from the seabed to eat the small animals and plants that live there.

James Leaton of international conservation group WWF says, 'It is time Shell admitted delaying offshore construction because it cannot guarantee protecting the whales. Shell’s selective hearing has meant it is not willing to listen to the majority of parties who see this as a disaster waiting to happen. Elliot Morley, the UK Environment Minister has expressed the need for the best scientific advice to be followed. Shell’s shareholders have lost faith in the company on oil reserves; how can Shell’s stakeholders trust the company on these sensitive issues?

END OF EXTRACTS

Link to relevant article: http://www.sakhalin.environment.ru/en/detail.php?slice=...22219

Consequently there is far more than money at stake.

Article ends.

(I would like to thank the Shell insider who provided the inspiration and some of the expert content of this article.)

Re-section to Other Press, cos it is in the news anyhow even though analysis is good.