Times Online: Shell set to ‘cede control’ of Sakhalin-2 (Shell Surrenders?)

December 11, 2006
TIMES ONLINE AND AGENCIES 

Shell has agreed in principle to cede control of the $22 billion (£11 billion) Sakhalin-2 project to Russian gas monopoly Gazprom after months of government pressure.   

Reuters reports, quoting unidentified sources, that an accord whereby Shell would keep a blocking stake of at least a quarter in the world’s largest liquefied natural gas project was reached on Friday at talks between Shell chief executive Jeroen van der Veer and Gazprom’s head Alexei Miller.

The agency said that Gazprom will swap oilfield assets and possibly make a cash payment for a controlling stake of over 50 percent in Sakhalin-2. Anglo-Dutch Shell now owns 55 percent and is the project’s operator.

Another industry source has said that the Japanese companies may sell 10 percent each, thus enabling Gazprom to secure majority control.

As part of the transaction, Shell’s project partners — Japan’s Mitsui & Co and Mitsubishi — would reduce their stakes, which are currently 25 and 20 percent respectively.

Gazprom had no immediate comment, while a Shell spokesman confirmed that a meeting had taken place.

“I can confirm that Shell Chief Executive Jeroen van der Veer met Gazprom head Alexei Miller and Energy Minister Viktor Khristenko in Moscow on Friday to discuss Sakhalin-2-related issues,” the spokesman told Reuters. “The discussions were positive but their contents remain confidential.”

The understanding comes after months of pressure from Russia’s Natural Resources Ministry and its environmental regulator, which have accused Shell of ecological violations in project work on the remote Far Eastern island of Sakhalin.

Industry analysts suspect the official campaign was designed to secure better terms for Russia, which has no equity stake in Sakhalin-2 under a production-sharing agreement struck in the early 1990s.

Work on the Sakhalin-2 project, which will supply an LNG processing facility with a capacity of 9.6 million tonnes per year, is mostly complete but threats of licence withdrawals, fines and litigation are disrupting development work.

A doubling of estimated costs at Sakhalin derailed an earlier deal under which Shell would have swapped a one-quarter stake in Sakhalin for an interest in Gazprom’s onshore Zapolyarnoye field.

One Moscow-based investment banker told Reuters last week that Gazprom was poised to secure a majority in Sakhalin.

“It’s likely to follow the general trend of state companies getting control,” the banker said, adding he expected a final resolution to the long-running conflict in the first quarter of 2007.

The project will continue to operate on the basis of a production-sharing agreement, an arrangement whereby project costs are first defrayed before revenues accrue to the Russian state. “The PSA stands,” one industry source told the agency

http://business.timesonline.co.uk/article/0,,9072-2498562.html

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