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The Independent: Shell moves deeper into Russia with Gazprom swap

The Independent: Shell moves deeper into Russia with Gazprom swap

“Mr van der Veer denied that Shell has been pressured in any way to part with some of its interest in Sakhalin so that the Kremlin could keep valuable natural resources in Russian hands. He said the plan has also been to bring in a Russian partner.”

Friday 8 July 2005

By Michael Harrison, Business Editor

Published: 08 July 2005

Shell signalled its determination to expand further into the Russian oil industry yesterday by signing a multi-billion dollar deal to swap assets with the state-owned gas producer Gazprom.

The agreement, signed in London by the Shell chief executive Jeroen van der Veer and the Gazprom chairman Alexei Miller takes the Anglo-Dutch company into the heartland of Russia’s oil and gas province by giving it a 50 per cent stake in the giant Zapolyarnoye-Neocomian field in western Siberia.

In return, Shell has agreed to give Gazprom a 25 per cent stake in its Sakhalin-2 venture off Russia’s eastern coast, which is costing about $10bn to develop. Shell will be compensated for the difference in value of the two assets with a package of cash and other assets.

The deal, which will give Shell access to more oil and gas than it is surrendering, will help the company rebuild its battered portfolio after last year’s scandal when it was forced to cut its reserves by a quarter.

Mr van der Veer also said the deal “tees up” Shell for other potential deals with Gazprom and, in particular, held out the prospect of it taking a stake in Shtokmanovskoye gas field in the Barents Sea some 570 kilometres off the coast of Murmansk. However, a string of other western oil majors are courting Gazprom for a stake in the field.

Sakhalin-2, the largest liquefied natural gas (LNG) project in the world, is estimated to contain about 4 billion barrels of oil compared with the 3 billion barrels which lie in the Zapolyarnoye field. As a result, the asset swap will result in Shell giving Gazprom access to around 1 billion barrels of oil while getting its hands on 1.5 billion barrels. “This is an absolute win-win. It helps our resource base and our production,” Mr van der Veer said.

Shell will remain the biggest single shareholder in Sakhalin after the asset swap is complete – a process expected to take about 12 months – with a 30 per cent stake. The other two shareholders are Japan’s Mitsui and Mitsubishi with stakes, respectively, of 25 per cent and 20 per cent.

Mr van der Veer denied that Shell has been pressured in any way to part with some of its interest in Sakhalin so that the Kremlin could keep valuable natural resources in Russian hands. He said the plan has also been to bring in a Russian partner.

“It is a logical thing to have a Russian partner, we have said that for some time but there was no point selling down for cash,” Mr van der Veer added. “Sakhalin is such a crown jewel that that we needed to swap it for something which was attractive for our own strategy.”

Sakhalin-2, which is being developed in the teeth of fierce resistance from environmentalists alarmed at its impact on marine life, is already pumping oil for part of the year and is due to start producing gas from November, 2007. Shell has already signed up customers for its LNG in the United States and Japan and is also in talks with the Chinese and Koreans. The Zapolyarnoye field, by contrast, is still on the drawing board and is years away from production.

Shell signalled its determination to expand further into the Russian oil industry yesterday by signing a multi-billion dollar deal to swap assets with the state-owned gas producer Gazprom.

The agreement, signed in London by the Shell chief executive Jeroen van der Veer and the Gazprom chairman Alexei Miller takes the Anglo-Dutch company into the heartland of Russia’s oil and gas province by giving it a 50 per cent stake in the giant Zapolyarnoye-Neocomian field in western Siberia.

In return, Shell has agreed to give Gazprom a 25 per cent stake in its Sakhalin-2 venture off Russia’s eastern coast, which is costing about $10bn to develop. Shell will be compensated for the difference in value of the two assets with a package of cash and other assets.

The deal, which will give Shell access to more oil and gas than it is surrendering, will help the company rebuild its battered portfolio after last year’s scandal when it was forced to cut its reserves by a quarter.

Mr van der Veer also said the deal “tees up” Shell for other potential deals with Gazprom and, in particular, held out the prospect of it taking a stake in Shtokmanovskoye gas field in the Barents Sea some 570 kilometres off the coast of Murmansk. However, a string of other western oil majors are courting Gazprom for a stake in the field.

Sakhalin-2, the largest liquefied natural gas (LNG) project in the world, is estimated to contain about 4 billion barrels of oil compared with the 3 billion barrels which lie in the Zapolyarnoye field. As a result, the asset swap will result in Shell giving Gazprom access to around 1 billion barrels of oil while getting its hands on 1.5 billion barrels. “This is an absolute win-win. It helps our resource base and our production,” Mr van der Veer said.

Shell will remain the biggest single shareholder in Sakhalin after the asset swap is complete – a process expected to take about 12 months – with a 30 per cent stake. The other two shareholders are Japan’s Mitsui and Mitsubishi with stakes, respectively, of 25 per cent and 20 per cent.

Mr van der Veer denied that Shell has been pressured in any way to part with some of its interest in Sakhalin so that the Kremlin could keep valuable natural resources in Russian hands. He said the plan has also been to bring in a Russian partner.

“It is a logical thing to have a Russian partner, we have said that for some time but there was no point selling down for cash,” Mr van der Veer added. “Sakhalin is such a crown jewel that that we needed to swap it for something which was attractive for our own strategy.”

Sakhalin-2, which is being developed in the teeth of fierce resistance from environmentalists alarmed at its impact on marine life, is already pumping oil for part of the year and is due to start producing gas from November, 2007. Shell has already signed up customers for its LNG in the United States and Japan and is also in talks with the Chinese and Koreans. The Zapolyarnoye field, by contrast, is still on the drawing board and is years away from production.

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