Russia blasts Sakhalin-2 cost overruns

Sept. 14, 2006
Russia's Natural Resources Minister Yuri Trutnev said his country could lose billions in the Sakhalin-2 oil and gas project if operators continue to raise expenditures.

Eric Watkins
Senior Correspondent

LOS ANGELES, Sept. 14 -- Russia's Natural Resources Minister Yuri Trutnev said his country could lose billions in the Sakhalin-2 oil and gas project if operators continue to raise expenditures.

"Operators' plans to increase reimbursable costs are not acceptable to the Russian side," Trutnev told state media Sept. 12. "We cannot avoid reacting. If these plans are implemented, the Russian Federation will lose some $10 billion."

While denying that the situation meant a worsening of the investment climate in Russia, Trutnev said, "The Russian Federation is obliged to protect its interests." He did not detail how it would do that.

The Sakhalin consortium last year announced that project cost overruns would be double the original estimate of $10 billion. Under terms of the production-sharing agreement, Russia may increase its profits only after the developers recoup their expenses.

"The Russian side is not pleased by the operator's attempts to book additional costs," a ministry spokesman quoted Trutnev as saying.

Trutnev's statements, however, give credence to speculation that criticism of the project by state environmental authorities is aimed at pressuring the consortium's partners instead of improving the environment (Oil & Gas Journal Online, Sept. 6, 2006).

Royal Dutch Shell PLC holds the majority ownership in Sakhalin, while a subsidiary of Japan's Mitsui & Co. holds a 25% stake and Diamond Gas Sakhalin, a unit of Japan's Mitsubishi Corp., holds 20%.

Contact Eric Watkins at [email protected].