Reuters: Shell may need to pay cash for Sakhalin swap-Gazprom

Reuters: Shell may need to pay cash for Sakhalin swap-Gazprom

“Russian gas giant Gazprom said on Wednesday that Shell might have to pay it cash as part of an asset swap after the oil major doubled the project’s cost estimates in July to $20 billion.”

Wednesday 21 Sept 2005

BEIJING, Sept 21 (Reuters) – Russian gas giant Gazprom (GAZPPE.RTS: Quote, Profile, Research) said on Wednesday that Shell (RDSa.L: Quote, Profile, Research)(RDSa.AS: Quote, Profile, Research) might have to pay it cash as part of an asset swap after the oil major doubled the project’s cost estimates in July to $20 billion.

Gazprom agreed in July to swap a 50 percent stake in its Siberian gas field Zapolyarnoye for a 25 percent stake in the Shell-led Sakhalin-2 liquefied natural gas (LNG) project off Russia’s far east coast.

Shell had been expected to be compensated through a package of cash and other assets.

But asked by Reuters if the cost overrun made it more difficult for Shell to ask for cash, Alexander Medvedev, the head of Gazprom’s export arm Gazpromexport, said: “It will be difficult. It will be probably the vice-versa picture.”

Shell has raised the cost estimate for Sakhalin-2, one of its flagship projects, due to rising metals prices, a weak dollar and Russian inflation. It also delayed some production dates for both LNG and crude.

“Subjectively the value of the asset declined… but for us the economics of the project are still good enough,” Medvedev told reporters in Beijing.

Gazprom said at the time that the revision diminished the value of Sakhalin, but had not said since whether it wanted to change the swap deal, which analysts had said was unequal since the Sakhalin project was more advanced than Zapolyarnoye.

The Sakhalin group, which also includes Japan’s Mitsui & Co. (8031.T: Quote, Profile, Research) and Mitsubishi Corp. (8058.T: Quote, Profile, Research), is building the world’s largest LNG plant with a planned capacity of 9.6 million tonnes a year.

Gazprom has long been trying to make its way into Sakhalin-2 as it would give the firm its long-awaited entry into the booming LNG business. Last week it formed a shortlist for choosing a partner in a separate $20 billion Arctic gas project big enough to supply the U.S. market for half a century.

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