How two men and a website in Colchester humbled one of the oil industry giantsby Derek Brower / February 25, 2007 / Leave a comment
It is not the kind of place you would expect to find at the centre of a global energy war. John Donovan’s office is in a modest house in a suburb of Colchester. No electronic maps of Europe adorn his walls, as they do the walls of Gazprom’s Moscow control room. And nor are there any butlers bringing cups of tea and expensive biscuits, as you find at Shell’s head office on the Thames. There is just Donovan’s 89-year-old father, Alfred, in the room next door.
But it is the home of www.royaldutchshellplc.com, a website which can claim to have cost Shell billions of dollars—and helped Vladimir Putin score another victory over western energy interests. This is how.
At the end of December, the Kremlin’s politically driven campaign to win control of a liquefied natural gas project on Sakhalin island came to its predictable climax. The deal signed in Moscow between Shell and Gazprom saw the Russian company take 50 per cent plus one share of Sakhalin Energy, the consortium developing the project.
It was an offer that Shell and its two Japanese partners on Sakhalin could not refuse. The project, on a remote island notorious for its harsh winters, is one of the largest ever attempted. Sakhalin Energy will produce 9.6m tonnes per year of liquefied natural gas and 180,000 barrels per day of oil when it comes on stream in 2008.
But Sakhalin ran into serious problems. The most important was its escalating costs. Last year, Shell reported that the price of the project had doubled to $20bn. Insiders tell me that the figure is now closer to $26bn.
That would not be such a big problem if it weren’t for the production-sharing agreement (PSA) that governs the project. PSAs are typically offered by countries that are desperate for oil majors to invest. To entice the companies, PSAs state that the host nation will only get a share of the profits once the developer has recouped its costs.
In the mid-1990s, when Shell signed the contract, the oil price was low and Russia was on its knees financially. Moscow needed the expertise Shell offered. But by the time Shell was announcing a doubling of costs on Sakhalin, President Putin was rather less respectful of foreign energy companies. The cost increase—which postponed, some said indefinitely, the moment when Russia would profit from the production of its own energy…