Daily Mail (UK): Shell in gas retreat after Russian assault

EXTRACT: “It is a blow… but they had to accept the inevitable.” It is now unlikely that the project will gain backing from the European Bank for Reconstruction and Development, which specialises in encouraging private- sector development in Russia and Eastern Europe.

By: Sam Fleming
Published: Dec 12, 2006

The battle between Russia and Royal Dutch Shell over the massive Sakhalin 2 gas project looks set to end in humiliating defeat for the Anglo-Dutch energy titan.

It emerged that Shell offered to surrender its majority stake in the GBP11bn project after a series of cost overruns and environmental violations left it at the mercy of Russian state-controlled gas giant Gazprom.

Shell boss Jeroen van der Veer met Gazprom chief executive Alexei Miller and Russian Energy Minister Viktor Khristenko in Moscow on Friday and offered to give up its 55pc stake in Sakhalin Energy, the company that operates the massive offshore oil and gas project.

Shell is believed to have proposed that Gazprom swap assets and make a cash payment for a controlling stake of over 50pc in Sakhalin 2.

Shell’s project partners — Japan’s Mitsui and Mitsubishi — would also reduce their holdings.

Shell said negotiations were “constructive” but they remained confidential. Its “A” shares slipped 11p to 1806p.

The move represents the latest escalation in Russia’s efforts to re-establish control of its vast natural resources, which were carved up on unfavourable terms during the chaotic 1990s.

Over the weekend President Vladimir Putin reportedly discussed taking control of energy extraction on Russia’s sea shelf through the union of three major state-controlled firms — Gazprom, Rosneft and Zarubezhneft.

The Kremlin’s latest moves will do nothing to enhance Russia’s reputation among foreign investors, said oil analyst Simon Wardell at Global Insight. ” Russia has considerable leverage and they feel the oil companies need them more than they need the oil companies,” he said.

“It is a blow (for Shell) given that it is such a big project and they invested so much not only financially but also in terms of time, but they had to accept the inevitable.” It is now unlikely that the project will gain backing from the European Bank for Reconstruction and Development, which specialises in encouraging private- sector development in Russia and Eastern Europe.

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