Russians file $10 billion lawsuit against Royal Dutch Shell for environmental damages on Sakhalin-2 project

Companies / Strategic News Dec 12, 2006 - 08:10 AM GMT

Russia's Environment agency Rosprirodnadzor, today said it was to file lawsuits against foreign oil companies developing the Sakhalin-2 oil and gas fields during early 2007. The agency estimated initial costs of the damage at $10 billions but could rise as high as $50 billion. Intense pressure from the Russian government is forcing Royal Dutch Shell to give up control of the lucrative $30 billion Sakhalin-2 project to state gas monopoly Gazprom as an attempt to elevate the pressure and get the project moving forward. Shell holds a controlling 55 percent stake in Sakhalin Energy. Japan's Mitsui and Mitsubishi own 25 percent and 20 percent.

Sakhalin-2 is being developed under a production sharing agreement, or PSA, which states that differences between shareholders and the Russian state are to be arbitrated in a court in Stockholm. The intense pressure being applied to the Sakhalin-2 project is in stark contrast to Sakhalin-1 which already has a major Russian shareholder , whereas Sakhalin-2 doesn't have a Russian shareholder. Russia also intends to claim lost revenue of $10 billions due to cost over-runs in the project, as the original agreement signed in 1994, allows Shell to recoup all of its expenditure before sharing any of the profits with the state. The original cost of the project was $12 billion, but that has now over run to $22 billion.

In total the Sakhalin-2 field holds some 1.1 billion barrels of crude oil and 500 billion cubic meters of natural gas.

Shells shares have fallen by some 15% from the peak set earlier in the year and trades on a PE of 8.61, as this coupled with even bigger problems in Nigeria where Shell has some 30% of its reserves, are likely to impact on future profits. This suggests that the Shell share price could sink further towards the low £17.00 where major support lies. Though the shares already by and large reflect this bad news so a more sustained drop below £17.00 looks unlikely.

Related Articles

Nov 30, 2006	Investing in Nigeria, potential opportunity for strong growth due to high oil revenues
Sept 21, 2006	SHELL's $20 billion problem with Sakhalin 2

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.