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. Last Updated: 07/27/2016

Sakhalin-2 a Good Deal for Shell and Gazprom

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The Sakhalin-2 integrated oil and gas project is the world's largest, operated by the Sakhalin Energy Investment Co., with Shell as one of its shareholders and technical adviser to the project. With a budget of $20 billion, the project represents the largest foreign investment project in the country's history.

Robert Skidelsky's comment "Coming Out Negative in the Balance," published in The Moscow Times on Jan. 19, made a number of assertions about the Sakhalin-2 project that I believe call for clarification.

To date, government revenues from the project have been more than $600 million. Once the project has reached cost recovery, the annual benefit to Russia in royalties, hydrocarbons profits and taxes will rise to around $2 billion per year.

In July 2005, Sakhalin Energy increased its development budget from $10 billion to $20 billion. The higher costs reflect sustained energy and raw material inflation, wage increases and the complexity of the project, which was originally underestimated. Despite the higher cost and schedule delay, Russia still stands to receive some $50 billion of revenues from the project at an assumed oil price of $34 per barrel, and much more at higher prices. The revised unit costs for many elements of the project are comparable to other projects around the world. Note that total development costs are around $5 per barrel, including major infrastructure investment and large-scale construction.

The production sharing agreement mechanism is such that the private investor bears most of the burden resulting from the decrease in economic efficiency of the project, meaning that Sakhalin Energy and its shareholders have a strong motivation to keep costs low. Contrary to Skidelsky's assertion, there is no guaranteed rate of return in this project and the final profits for investors depend strongly on cost control.

A comparison of tax regimes shows that the government's take from the Sakhalin-2 PSA is actually much bigger than in many other countries, including that in the United States.

We welcome Gazprom's entry into Sakhalin Energy as a leading shareholder. All shareholders see as their foremost priority getting Sakhalin-2 onstream and turning it into an international LNG hub.

Sakhalin-2 is a truly global undertaking and should be making headlines for much more positive and accurate reasons -- the pioneering Sakhalin-2 project itself. Not only is it the world's largest integrated oil and gas project, but it also represents Russia's first offshore oil production, its first offshore integrated gas platform and first LNG plant.



Alf D'Souza is vice president for corporate affairs in Russia for Shell Exploration and Production Services.