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The Guardian: Shell to cede control of £10bn Russian gas project: ‘Shell was being bullied out of Sakhalin-2″

Sakhalin II

(Amid allegations of unfair pressure by the Russian authorities, who accuse Shell of breaking environmental rules, the Anglo-Dutch group is set to cede an initial 25% stake in the Sakhalin gas project to the Russian state-owned energy group, Gazprom.)

Terry Macalister and Tom Parfitt
Monday December 11, 2006

Shell and its partners have bent to mounting pressure from the Russian government and offered to hand over a controlling interest in the $20bn Sakhalin-2 energy project to the state-owned energy group, Gazprom.

The proposal being considered by Gazprom could leave Shell with a quarter holding in the world’s largest liquefied natural gas (LNG) project, which has been dogged by environmental controversy.

Jeroen van der Veer, the Shell chief executive, made the offer to Alexei Miller, the Gazprom boss, at a meeting in Moscow last Friday that was described by Shell as “constructive.”

A deal could be announced as early as tomorrow by the Russian energy minister, Viktor Khristenko, but neither Shell nor Gazprom were willing to confirm details of any proposals tonight.

Shell has a 55% stake in Sakhalin, and its Japanese partners, Mitsui and Mitsubishi, hold 25% and 20% respectively in the operating company, Sakhalin Energy. Under the new arrangement, Gazprom is believed to have been offered a quarter share, which could be increased to as much as 55%, with Shell having 25% and Mitsui and Mitsubishi 10% each, in return for a cash payment.

Gazprom and Shell made an outline agreement in 2004 to discuss the swapping of assets in Russia, but it broke down after costs on the Sakhalin scheme soared from $10bn (£5.1bn) to $20bn. The new breakthrough comes after months of pressure on Shell from the Russian natural resources department and environmental agency, which have accused the Western companies of breaking the law.

“Shell did indeed make several proposals concerning Sakhalin-2 at a meeting on Friday. Gazprom has yet to decide on Shell’s proposals because the project’s problems, including ecological problems, remain in place,” said Sergei Kupriyanov, the main spokesman at Gazprom.

Shell would provide only a formal statement, which said: “Shell chief executive Jeroen van der Veer met with Minister Khristenko and Gazprom chairman Miller on Friday 8 December in Moscow to discuss issues connected with the Sakhalin II Project. The discussions were positive and constructive but the contents remain confidential.”

The authorities allege that Shell, which took the lead role in the Sakhalin-2 scheme under Russia’s first production sharing agreement (PSA) in 1994, has violated a series of “green” regulations.

The environmental agency, RosPrirodNadzor, has threatened to withdraw Shell’s operating licence and fine it billions of dollars for damaging the local ecology.

Last week the Russian authorities suspended the licence of a sub-contractor on Sakhalin-2, alleging that it violated water regulations when laying pipes.

The Kremlin is also openly furious at the doubling of costs on Sakhalin because it means the government tax take from the project will be smaller and much delayed. Under the PSA, the state must wait for the vast bulk of its revenues until all the costs are paid off.

President Putin’s spokesman, Dmitry Peskov, yesterday insisted that there was no connection between the environmental concerns and the Gazprom negotiations.

Mr Peskov expressed frustration at the way the discussions were characterised as an attack on Shell by the Russia, saying his country was very keen to welcome foreign investment.

Claiming that the US government’s pressure on BP about oil spills in Alaska was not reported in the same way as Sakhalin, Mr Peskov accused the Western media of a double standard. He said: “If it’s an environmental problem in Alaska it’s environmental. If it’s in Russia you call it politics.”

He said that British media allegations that the Kremlin was complicit in the poisoning of Alexander Litvinenko in London were “anti-Russian hysteria”.

Robert Amsterdam, a lawyer for Mikhail Khodorkovsky, the former boss of the Yukos oil company, who is now in prison in Siberia, said he had no doubt Shell was being bullied out of Sakhalin-2.

“The Kremlin has once again used legal pretexts to cover what is essentially an expropriation of private resources in the energy sector,” he said. “No one should be surprised that this is the result of the environmental review of Shell’s project.

“Extortion is not permissible as a method of acquisition. The Kremlin ought to cease this behaviour if it wishes downstream asset acquisitions in Europe to be welcomed.”

Vladimir Milov, a former deputy energy minister who is head of the Institute of Energy Policy in Moscow, told the Guardian that a proposal by Shell to give up control of the project to Gazprom would be “logical”.

“In the current situation, Shell will not be able to defend its economic interests in a civilised process with the Russian authorities, so they will be obliged to give up control if they want to save at least some adequate part of the project.”

Chris Weafer, chief strategist at Alfa Bank, predicted that Gazprom would acquire a 25% blocking stake in Sakhalin-2 as a stepping stone to a controlling stake. He said a controlling stake would most likely be taken later by acquiring 51% of shares pro rata from Shell and its Japanese partners, Mitsui and Mitsubishi.

“In legal terms, Shell could tough it out, but this is where the stick comes into it, in the form of the environmental agencies and the reviews of operating procedures,” he said. “It is a question of negotiating the terms of restructuring the deal rather than trying to fight the inevitable.”

Mr Milov said the environmental-protection attack was organised in the interests of Gazprom and he had no doubt it would stop after Gazprom has entered the project.

Mr Weafer said Shell’s problems were unlikely to affect foreign investment in Russia: “Everyone in the industry now understands the rules of the game – the state will get 51 percent of the energy industry and the rest will be up for grabs for everyone else.”

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