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AFX Europe (Focus): Shell says asset swap talks with Gazprom continue despite Sakhalin woes

Published: Oct 26, 2006

LONDON (AFX) – Royal Dutch Shell PLC and Gazprom are continuing discussions over a possible asset exchange, which includes Sakhalin-2, despite the environmental problems suffered by the controversial 20 bln usd Russian gas project.

The pair last year signed a preliminary agreement giving Gazprom, the Russian gas monopoly, a 25 pct stake in Sakhalin-2.

Shell, in return, will get a 50 pct interest in Gazprom’s Zapolyarnoye field in Siberia, the world’s fifth-largest gas deposit.

Jeroen van der Veer, Shell’s chief executive, told reporters in a conference call that the “discussions are ongoing” between Shell and Gazprom.

“We hope to welcome Gazprom in the project,” he said, adding that he hopes to update investors on the progress of the talks towards the end of the year.

Cost overruns — fuelled by soaring oil prices — doubled the investment in the project to 20 bln usd, and delayed the start-up to 2008. This has upset Russian authorities which, over the past months, have subjected Sakhalin-2 to what Van der Veer called an “unprecedented” level of scrutiny.

One of Sakhalin-2’s key permits was revoked by the government last month after a series of checks showed the project breached environmental rules.

“We’re treating this (environmental) issue as top priority,” said Van der Veer.

Shell owns a 55 pct stake in Sakhalin Energy Ltd, which is carrying out the Sakhalin-2 project. Japan’s Mitsubishi Corp and Mitsui & Co own the remaining 45 pct.

Under a production sharing agreement between Sakhalin Energy and the Russian government, at least 70 pct of the cost of Sakhalin-2 will be absorbed by the company. The government, meanwhile, will have to shoulder the rest.

The PSA also prescribed that the government could only share in Sakhalin-2’s revenues once the company has fully recovered the cost it incurred in developing the project.

Based on the prevailing oil prices, Peter Voser, Shell’s chief finance officer, said the “cost recovery will be completed in 2013.”

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