International Herald Tribune: Gazprom considering new offer from Shell on Sakhalin energy project

EXTRACT: “If the proposal contains a majority stake, then it’s a major breakthrough for Gazprom,” said Jeffrey Woodruff, an energy analyst with Fitch Ratings in Moscow. “It would be a setback for Shell, because it was counting on Sakhalin-2 to boost production and reserves.”

THE ARTICLE

Bloomberg News, Reuters, The Associated PressPublished: December 11, 2006
 
MOSCOW: Royal Dutch Shell said Monday that it had made a new offer to Gazprom on terms for the state-controlled Russian natural gas giant to join a Shell-controlled energy project off the Pacific island of Sakhalin.

No details were released about the offer, which came during a meeting Friday between Shell’s chief executive, Jeroen van der Veer, and his counterpart at Gazprom, Alexei Miller.

The talks were “positive, constructive and the content remains confidential,” a Shell spokesman, Maxim Shoob, said. Gazprom’s spokesman, Sergei Kupriyanov, said the proposals were being analyzed.

Both he and Schoob declined to confirm or deny a Reuters report, which cited unidentified industry people as having said that Shell had agreed to cede state-run Gazprom a majority stake in the project, called Sakhalin-2.

Russian regulators have turned up the pressure on the Shell-run development, and last week water protection authorities suspended the licenses of a subcontractor.

Some in the industry contend that the pressure is aimed at securing more favorable terms for Gazprom to join the project. Shell angered Russia last year when it announced that the cost of the project would double to $22 billion, delaying the point at which the Russian government would see revenues from it.

“The days when foreign companies could envisage control over Russian oil and gas projects are over,” said Stephen O’Sullivan, head of emerging markets research at Deutsche Bank in Moscow. “Having 50 percent minus one share in a project that can expand and develop is better than having control of a project that is going nowhere.”

Much of the liquefied gas from Sakhalin-2 is destined for Japan, which is seeking to reduce its dependence on the Middle East for energy. Two Japanese companies, Mitsui and Mitsubishi, hold 25 percent and 20 percent stakes, respectively, in the project.

The Russian government’s campaign against Sakhalin-2, the biggest foreign investment in the country, has stirred parked concern in the United States, Europe and Asia that Russia will use energy as a political lever.

Sakhalin-2, Russia’s only major oil and gas project fully owned by foreigners, has faced environment audits and a possible loss of permits as shareholders negotiate a $10 billion budget increase with the government and the entry of Gazprom to the project. The venture is key to Shell’s plans to revive output and increase reserves.

Shell and Gazprom announced last year a preliminary agreement for Gazprom to acquire 25 percent of Sakhalin-2 for half of Gazprom’s Zapolyarnoye field in the Arctic. Gazprom suspended talks after Shell doubled the project’s costs.

Gazprom has been eager to gain access to the oil and gas deposits off Sakhalin Island, as well as Russia’s first liquefied natural gas plant, which is expected to begin exporting fuel in 2008.

An agreement with Shell would allow Gazprom to maintain control over Russian gas exports. While the company’s export monopoly is enshrined in law, Russia’s three production sharing agreements with international oil companies, including Sakhalin-2, are exempt.

“If the proposal contains a majority stake, then it’s a major breakthrough for Gazprom,” said Jeffrey Woodruff, an energy analyst with Fitch Ratings in Moscow. “It would be a setback for Shell, because it was counting on Sakhalin-2 to boost production and reserves.”

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