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Reuters: Gazprom close to deal to take half of Sakhalin-2

12 Dec 2006 18:20:12 GMT
By Oleg Shchedrov and Tom Miles

MOSCOW, Dec 12 (Reuters) – Russia’s Gazprom closed in on half of Royal Dutch Shell’s $22 billion Sakhalin-2 energy project on Tuesday while Shell denied it had buckled under Kremlin pressure and warned Moscow the world was watching.

“The two sides are close to reaching an agreement over how Gazprom can enter this project,” the gas monopoly’s Chairman Dmitry Medvedev, who is first deputy prime minister, said after signals emerged that Shell would cut a deal.

Shell, which has a 55 percent stake in Sakhalin-2, said it still expected to win fair treatment after facing enormous pressure from Moscow to surrender control over the world’s largest liquefied natural gas (LNG) project.

But even as a deal took shape, Russia’s state environmental agency threatened to treble planned damages claims to $30 billion against the project operator for ecological violations on Sakhalin Island off Russia’s Pacific coast.

Medvedev said state-controlled Gazprom planned to buy around 50 percent of Sakhalin-2 in exchange for cash and assets, although he did not go into details.

“The question of the share is an important one, but it’s not the main issue,” said Medvedev, a possible successor to President Vladimir Putin. “It could be 50 percent or a little less. The question is about how to estimate the costs and configure the business.”

Shell has offered to cede control of Sakhalin-2 to Gazprom after irking the Kremlin by announcing a doubling of project costs. But industry sources say Shell’s LNG expertise means it should stay on as project operator.

Spokesman Alf D’Souza denied Shell had knuckled under to a Kremlin campaign for strategic control.

“There’s been a lot of reporting that we’ve thrown in the white flag,” D’Souza said.

“There’s no doubt that the eyes of the world are on this foreign investment, the largest in Russia. Shell and its fellow investors expect to be treated equitably.”

Sources say Shell may give up 30 percent and its Japanese partners — Mitsui & Co <8031.T> with a 25 percent stake and Mitsubishi <8058.T> with 20 percent — 10 percent each to hand Gazprom control.

Meanwhile, Energy Minister Viktor Khristenko said talks were moving forward on a revised Sakhalin-2 budget. He forecast an agreement in the first quarter of 2007.

Sakhalin-2 is due to come onstream in 2008 and supply Japan, Korea and the United States by tanker with 9.6 million tonnes per year of supercooled gas.

TRIPLE WHAMMY?

But if Shell hoped an impending deal will win it an easier ride in Russia nobody told Oleg Mitvol, the deputy head of the state environment agency, who has threatened Shell-led operating company Sakhalin Energy with fines, licence withdrawals and lawsuits.

Mitvol said that, after taking advice from Western lawyers, he may bring damages claims totalling $30 billion to the international arbitration court in Stockholm.

“We will be ready to take legal action from March,” he said.

Mitvol also turned his fire on gold miner Peter Hambro , telling Reuters he had started safety checks on all of its Russian operating licences. The news sent the London-listed company’s stock down by 15 percent.

Analysts have viewed Mitvol’s rigour over environmental protection as a tool to reassert Kremlin control over minerals.

D’Souza said Shell took all allegations of environmental violations seriously but suggested these were overblown as any damage the company had done could easily be reversed.

“Their character is wholly temporary and reversible,” he said. “To take it out and isolate it as an example of egregious harm is quite incorrect.”

VALUATION SQUEEZE

Analysts said the pressure on Shell is designed to secure favourable terms for Gazprom to enter Sakhalin, which after accounting for project costs has a net present value estimated at between $12.7 billion and $23.6 billion.

“It’s all down to politics. It’s beyond the fundamentals of the project,” said Peter Hitchens at Teather & Greenwood. “It looks like Gazprom wants to try and get in at cost and it looks like Shell wants to make some money.”

Shell’s London-listed A shares closed down 1.05 percent at 1,787 pence. Gazprom’s shares were down 1.52 percent at 297.10 roubles.

It was not immediately clear what shape an assets plus cash deal might take, but industry sources said Shell was no longer seeking a stake in Gazprom’s Zapolyarnoye field as part of the negotiations over Sakhalin-2.

Last year Shell agreed in principle to swap 25 percent of Sakhalin-2 for half ownership of the deep deposits of the Zapolyarnoye gas field, located north of the Arctic Circle in West Siberia. Subsequent cost overruns derailed that deal. (With reporting by Dmitry Zhdannikov, Tanya Mosolova and Guy Faulconbridge in Moscow, and Tom Bergin in London)

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