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. Last Updated: 07/27/2016

Shell to Put $1Bln in West Siberian Project

A day after trading accusations with the government over the cause of project delays, Royal Dutch/Shell on Tuesday approved a budget of more than $1 billion to develop the Salym fields in western Siberia.

"The fact that we are actually making this investment shows that we have complete confidence that the license issue will be resolved," Shell spokesman Simon Buerk said.

The announcement comes hard on the heels of threats by the government to withdraw the Salym license because of the Anglo-Dutch group's failure to meet exploration targets.

Shell became one of the biggest foreign investors in Russia when it gave the green light this year for a $10 billion project on the remote eastern island of Sakhalin, where it will build the world's largest liquefied natural gas plant by 2006.

But while the Sakhalin plan is progressing smoothly, the company is finding it increasingly difficult to agree on developing Salym, which has reserves of up to 880 million barrels.

Shell has been waiting for years for a production-sharing agreement for Salym that would give it tax exemptions, but in the absence of such a deal last year the oil major decided to develop the fields on a regular tax regime.

Shell criticized Russian authorities on Monday for the delay it is facing in developing Salym, saying in a statement the impediments could hurt the country's investment climate.

"The decision to proceed with the Salym fields is an important step forward in the development of Shell's presence in Russia, a country of high strategic importance for the group," Walter van de Vijver, CEO of Shell Exploration and Production, said in a statement.

Shell has already invested $170 million in Salym.

The three fields in western Siberia are being developed under an equal partnership between Shell and Sibir Energy. The Salym fields are located in the Khanty-Mansiisk autonomous district, 190 kilometers from the town of Nefteyugansk.

Maxim Shoob, the spokesman for Shell Production and Development said Tuesday that Shell's approval of the $1 billion budget for Salym was unrelated to the government's complaints about delays; instead, the announcement was the logical next step after abandoning five years of efforts to get the fields developed under a production-sharing agreement similar to one it has on Sakhalin establishing a stable tax regime. After the government revised its PSA policies last year, Shell decided it would tap the field under existing tax conditions.

But $1 billion represents only a start to the project, said Kaha Kiknavelidze, oil and gas analyst with Troika Dialog. Troika estimates that as much as $2 billion will be needed to find and develop Salym's recoverable reserves.

"Given how little has been happening over past five years, it is a lot of money, but it is still just the beginning," he said, adding that Natural Resources Ministry complaints might have served to help spur Tuesday's announcement.

In addition, significant investments will be needed to build transport infrastructure, including a spur to connect the field with pipeline monopoly Transneft's network.

(MT, Reuters)