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The Wall Street Journal: Shell Makes New Offer to Gazprom On Sakhalin-2 Oil-and-Gas Project: (*We Surrender)

PRESS CONFERENCE IN MOSCOW TOMORROW

By GREG WALTERS
December 11, 2006 7:23 a.m.

MOSCOW — Royal Dutch Shell PLC made new proposals on its 55%-owned Sakhalin-2 oil-and-gas development to prospective partner OAO Gazprom, Gazprom spokesman Sergei Kupriyanov said Monday, in an apparent attempt by the Anglo-Dutch oil major to push the troubled project forward.

Shell Chief Executive Jeroen van der Veer met Friday with Gazprom CEO Alexei Miller and Russia’s Minister of Industry and Energy Viktor Khristenko, both companies said, but neither company would give further details of the talks. “The discussions were positive and constructive, but the contents remain confidential,” a spokesman for Shell said.

The Ministry of Industry and Energy, however, said that Mr. Khristenko would hold a press conference Tuesday in Moscow, during which he would answer questions about Sakhalin-2. The spokesman said the ministry wouldn’t comment before the press conference.

Shell had previously agreed to give Gazprom a 25% stake in Sakhalin-2 in exchange for a 50% stake in the Zapolyarnoye natural gas field in Russia’s far north. Talks became bogged down, however, after the Shell-controlled Sakhalin-2 operator, Sakhalin Energy Ltd., disclosed that the cost of the project would nearly double to about $20 billion.

Sakhalin-2 has since faced intense environmental scrutiny and a wide variety of threats from Russian regulators, who have said they want to shut down the project. (See related article.)

Analysts have linked Sakhalin Energy’s regulatory woes to an apparent attempt by Russian officials to get a better deal out of the shareholders of Sakhalin-2 on the project.

Gazprom and Shell reached an agreement in principle in 2005 that Gazprom would take a 25% stake in Sakhalin Energy. Gazprom has since publicly denied it was seeking a larger stake in the company. Shortly after the Gazprom and Shell deal was reached last year, Sakhalin Energy announced its projected costs would nearly double for Sakhalin-2, prompting Gazprom to say it couldn’t make a final commitment on entering Sakhalin-2 until the cost of the project was confirmed.

Sakhalin-2, said by Sakhalin Energy to be the world’s largest integrated oil and gas project, is developing oil and natural gas reserves off the coast of Sakhalin Island in Russia’s Pacific Coast north of Japan.

Japanese partners Mitsui & Co. Ltd. and Mitsubishi Corp. own 25% and 20% of Sakhalin Energy respectively. “About this stake issue, Shell and Gazprom are in talks now. Mitsui & Co. will consider what to do after they reach an agreement,” a Mitsui & Co. spokesman said.

A Mitsubishi Corp. spokesman wasn’t immediately available to comment.

Write to Greg Walters at [email protected]

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