Sakhalin II to cost $8 billion more than planned

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MOSCOW, July 15 (RIA Novosti) - The Sakhalin Energy company that operates the Sakhalin II project has reassessed specific investment volumes, increasing the entire cost estimate for the project by $8 billion, meaning project-recoupment deadlines will soar at least two-fold, the daily Vremya Novostei reported.

The preliminary SE cost estimate sets the project at nearly $20 billion, whereas initial investments were to have totaled $12 billion. Royal Dutch/Shell, which owns 55% of SE shares, has become more secretive after the 2003 scandal in which real-life deposits were overstated. The new sum is not final and evokes many doubts, Royal Dutch/Shell CEO Jeroen van der Veer said during a July 14 Internet conference.

The project's Japanese partners, Mitsui, which has a 25% stake and Mitsubishi, which holds 20% of the shares, are likely to voice additional doubts. Russian officials consistently hindering efforts to increase cost estimates of projects that are implemented in line with production-sharing agreements will be even more skeptical. This delays real-life work and incipient production-sharing plans.

The concerned departments, namely, the Industry and Energy Ministry, Rosenergo and the Ministry of Finance, still refuse to comment on the SE estimate. Moreover, Shell and Gazprom concluded an agreement on exchanging a blocking package of Sakhalin II stakes for a 50% share in Gazprom's Zapolyarnoye-Neokom project last week. This deal is to be finalized next year. Investments will match the corporate stake, after Gazprom becomes a project shareholder.

The Sakhalin II project is developing the Piltun-Astokhskoye and Lunskoye deposits, containing 185 million tons of crude oil and 800 billion cubic meters of natural gas, in accordance with a production-sharing agreement. The project calls for building two liquefied natural gas production lines with an annual capacity of 9.6 million tons. The possible construction of a third production line is also being discussed. Liquefied natural gas deliveries were scheduled to begin in November 2007. Contracts have already been signed for 80% of Sakhalin II's gas and remaining gas sales will be formalized later in the year.

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