Shell's Sakhalin Shell Game

Coming Clean on Sakhalin-2

Europe Wary of Sakhalin Loan By GUY CHAZAN January 2, 2007; Page A4 MOSCOW — A potential about-face by the former Communist bloc’s biggest single investor over a massive Russian energy project comes amid rising Western concern about increasing state control of that nation’s energy sector. The European Bank for Reconstruction and Development is likely to abandon a loan to Sakhalin II, the huge energy project in the far east of Russia, after Royal Dutch Shell PLC and its two partners were forced to sell a 50% stake in the venture to Russian natural-gas giant OAO Gazprom.

One of the great legacies of the "excellent" rule of the Russian embarrassment, Yeltsin, was the would be economic disaster of Sakhalin-2, the first totally private development project in Russia.

The project was originally a three company cooperative lead by Shell 55%, Mitsui 25%, Mitsubishi 20% named Sakhalin Energy.

On the surface, the project looked like a normal enough setup. At a time, when Russia still lacked a lot of the newest technology for exploration, this project brought in 3 foreign companies to invest and develop the field. In exchange, all production would go to export and before any taxation was taken out on the product, the companies would be allowed to recoup their losses. Fair enough, right?

Well, as with all such things, when dealing with the West (and the Japanese in this case), best read all the fine, very fine, and minute print. The obvious question becomes, how do you screw the Russians out of all their oil and tax monies?

Actually, quite easily. First, the contract, which was signed on 22 June 1994, set the per barrel oil price at less then half the value of that day's oil value and set the growth on a standard, no questions asked, 3% per year growth rate through the year of 2045A.D. So, by the time oil was hitting $60, the contract had it at $34. Thus, by under scoring the cost of the product, you get a lot more out of the ground, to pay off the investment, before having to pay taxes.

The other way of doing this, and of course, they did both, was the highly increase the "cost" of the development. Originally billed at $12 billion, when the contract was signed, the cost of investment was rewritten as $22.2 billion through the year 2010.

Both these moves insured that less then 10% of the 150 million tons of oil and 500 cubic meters of gas, would be taxed and non of it would ever reach the Russian market. For Shell and its partners, this would be the robbery and hoodwink of all robberies and hoodwinks. At even $40 per barrel, they could easily pump all that oil out, without breaking down, even seriously, the $22.2 billion price tax, while realizing a $20+ (and that plus reached over $80 when oil hit over $120) profit per barrel (not counting logistics costs).

What a game, what a game.

Of course, when Putin and his people came in, they say the obvious theft and fraud for what it was and were at powerless to tare up the contract. The reason for this was the massive storm of negative publicity that would draw on Russia from the West's attack dog, slave media. This at a time when Russia was desperate for investment.

So, a Russian being a Russian, Putin looked at other options.

To that end, Putin sent Oleg Mutvol, the vice minister of Rosprerodobzora, the Russian version of the Environmental Agency. The man quite out did himself. Congratulations.

It is common in the West to believe that Russia is a lawless wild East. That is rather far from the truth. While it is true that enforcement is often lax, there are, actually, quite a large collection of very specific laws and standards.

What Oleg found were destroyed forests, polluted rivers, dead lakes and decimated off shore fisheries, all the result of Shell's careless construction of the pipe network and other infrastructure. Shell and its partners were so arrogant about their ability to do as they pleased, they did nothing to hide their crimes and paid little attention to Mr. Mutvol. However, Mr. Mutvol paid very close attention to them.

By September 2006, construction was halted and an accounting was begun. What is the value of a tree? Of a salmon? Of a Gray Whale? What is the value of the economic life of the local people being destroyed? Tens of thousands of fishermen and their families faced disaster. Over a million tons of waste and dredging soil was dumped off sea. For this alone, Sakhalin Energy was sued and forced to pay out $110k. A pittance of a compensation.

River effects are noted as follows in the "Sakhalin Energy's muddy waters - A "few cases" where Sakhalin Energy is endangering wild salmon on Sakhalin Island":

Pilenga River: Erosion control is visible on one bank but not on the other bank of
the as of April 2006.

Mereya River: Active slope erosion and water pollution as of July 2005.

Woskresenkovka River: The clear river is threatened by the creation of a junction of
two pipeline trenches filled with mud as of December 2005.

Golubichnaya River: Normally this river would not be frozen solid in winter but the
digging of the trench has provoked the complete lack of river flow as of December
2005.

Bystraya River: The river ice is covered by soil as a result of the river crossing,
which will result in additional contamination when the ice melts as of December
2005.

Stolichnyi stream: Ploughed-up channel of spawning stream and active erosion and
silted processes as of August 2005.

This was all just the tip of the iceberg. Before the full extent could even be calculated up, Shell saw the writing on the wall. In order to get out of its responsibility to pay, it gave up control of Sakhalin-2, handing Gazprom 50% +1 vote and leaving itself 27.5%, Mitsui 12.5% and Mitsubishi 10%.

Now that one more of Yeltsin's traitorous legacies has been cleaned up, taxes are flowing in to Moscow, even as Moscow spends large sums to purchase medical equipment, upgrade the universities and rebuild the army, as well as tax breaks to get new businesses and factories opened.