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. Last Updated: 07/27/2016

Shell's Sakhalin Venture Faces $2.5Bln Claim

The State Audit Chamber has issued a report accusing a Royal Dutch/Shell-led group of causing damage to state interests worth up to $2.5 billion, Vedomosti reported Wednesday.

The Audit Chamber said investors in the Sakhalin-2 project had overspent by $2 billion by selecting expensive suppliers of goods and services, reducing the state's share of the profits, the report said.

Shell's Russia country chairman John Barry said his company would cooperate fully with the Audit Chamber and seek to clarify any misunderstandings over the financing of Sakhalin-2.

"This audit was kicked off last July and ran through to November. Sakhalin Energy extended its full cooperation," Barry said. "We need a dialogue."

Barry told a news conference that the Sakhalin-2 production-sharing agreements, signed in 1994, had brought huge economic benefits to the Far East.

Russia could expect to reap $40 billion to $50 billion in future revenues, on top of the $400 million that have already gone to the public purse, he added.

Back tax claims against firms have hit investor confidence after the demise of oil major Yukos, but analysts said the report was unlikely to have a negative impact on Sakhalin-2, in which Shell has a 55 percent stake.

The chamber argued in the report that investors, which also include Japan's Mitsui with a 25 percent stake and Mitsubishi, which owns 20 percent, should compensate the state for the damage, Vedomosti said.

"We came to the conclusion that the terms of this project are extremely unfavorable for the state," state auditor Mikhail Beskhmelnitsyn told the paper. "The investor should compensate the state's losses."

But auditors accepted that the government was partially responsible for the losses, given that officials were involved in approving spending for Sakhalin-2.

Shell has been producing oil from the project, located on the remote island of Sakhalin, since 1999 and plans to build the world's largest liquefied natural gas plant to supply Japan, the United States and other countries from 2007.

Sakhalin-2, ExxonMobil's neighboring Sakhalin-1 and Total's Siberian Kharyaga fields are the only three production-sharing deals to have survived changes in legislation several years ago.

Analysts said they believed the report by the Audit Chamber, which has no real executive power and can only issue recommendations, would not damage one of the biggest projects by a foreign company in Russia.

"We do not expect the report to lead to any negative consequences for Sakhalin-2," said UFG brokerage.

"We think the stability of contracts ... is essential for Russia," Troika Dialog said.

"The Sakhalin-1 and Sakhalin-2 projects account for 40 percent of the total foreign direct investment in Russia's oil sector and their success is crucial for attracting new investment to the industry from abroad," Troika added.