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. Last Updated: 07/27/2016

Report: Sakhalin-2 $2Bln Over Budget

Royal Dutch/Shell's huge $10 billion liquefied natural gas project on Sakhalin island is $2 billion over budget, the Times of London reported Friday.

A Shell spokesman in Moscow admitted the cost of the project, known as Sakhalin-2, may rise due the weak dollar and booming prices of raw materials, but he declined to comment on whether the budget would be changed anytime soon and on what the size of any changes might be.

"There are cost pressures on the project from foreign exchange movements and growth in regional economies," he said. He said China's economic growth led to a price increase for raw materials.

The Times quoted sources close to the project as saying that an internal review of the world's largest LNG plant project had uncovered additional costs for offshore platforms, pipelines and related infrastructure.

The cost overruns come as the Anglo-Dutch oil giant is already under pressure after a recent shock over its having misreported its reserves, which led to the resignation of chairman Phil Watts.

"We are in early stages of this project and we are reviewing both the costs and the execution status. This is normal practice in large complex projects," the spokesman said.

"If appropriate, we will disclose the latest position on the status and costs when we are in a position to do so," he said, adding that the firm was committed to shipping the first LNG supplies from the project at the end of 2007.

The Times said Sakhalin was one of Shell's core investments, and is expected to contribute more than 200,000 barrels per day of additional oil and gas output. But the sudden ballooning of its budget has raised questions over how the project was given the green light by Watts last May.

Shell, based in London and The Hague, is under investigation by the U.S. Securities and Exchange Commission after overstating its proven oil and gas reserves by more than one-fifth. Projects such as Sakhalin are needed to provide new reserves and offset declining production from places such as Britain and the United States.

Shell-led Sakhalin Energy is pumping oil and gas from the seabed off Russia's Pacific coast in the Sea of Okhotsk, covered by ice from October until May and often stormy in the rest of the year.

The group had to suspend pumping in December to prevent damage to tankers during the winter because of heavy ice. Supplies to the group's camp on the Sakhalin shore are often hampered by winds and fog that makes airplane and helicopter flights to the northern part of Sakhalin impossible. Environmental groups have sued, claiming the project threatens a pod of about 100 gray whales that feeds in the area.

Sakhalin Energy is 55 percent owned by Shell. Japan's Mitsui & Co. holds 25 percent and Mitsubishi Corp. owns a 20 percent stake.

(Reuters, Bloomberg, MT)