The Guardian: Shell struggles to get a better deal as Russia closes in

Terry Macalister and Tom Parfitt in Moscow
Wednesday December 13, 2006

Shell is fighting a rearguard action against attempts by the Kremlin to seize control of the world’s largest liquefied gas project, Sakhalin-2, at a knockdown price by insisting that it will only hand over assets as part of a wider peace settlement.

The demands by the Shell chief executive, Jeroen van der Veer, followed renewed attacks on the company’s environmental record yesterday in which a Russian state agency said it would be seeking damages of $30bn (£15.4bn).

“There’s been a lot of reporting that we’ve thrown in the white flag,” Shell’s Moscow spokesman Alf D’Souza said. “The negotiations have not been concluded, contrary to what’s been said. There are a number of options that are being considered.”

At the London head office company officials said: “No single element [of this deal] can be agreed in isolation from the whole. Shell and fellow investors expect to be treated equitably. There are a number of options under consideration to achieve equitable value balance.”

Industry insiders said the statement was meant to underline that the Anglo-Dutch group would not agree to cut its stake in Sakhalin and give it to Gazprom at a discount and certainly not without a Russian promise to halt the assault on its environmental record and an agreement on how to deal with cost overruns.

Gazprom chairman Dmitry Medvedev confirmed yesterday that the Russian energy group was close to a deal that would bring the Kremlin a large stake in the $20bn Shell-led oil and gas development on Sakhalin island in Russia’s far east.

He told a press conference in Moscow that an announcement was imminent.

“The two sides are close to reaching an agreement over how Gazprom can enter this project,” said Mr Medvedev, who is also deputy prime minister.

The state-controlled company, however, could settle for less than a 50% stake: “As far as the size of the stake is concerned, it is important but not critically important,” he said.

Shell has accepted it will have to reduce its 55% stake down to nearer 25% with its Japanese partners also making cuts. President Vladimir Putin has said he wants the state to keep majority control over strategic energy resources, and the Kremlin appears keen to unpick some deals that it made with western firms in the 1990s.

The production sharing agreement from that era, which means Shell and its partners can recover all project costs before sharing profits with the Russian government, is considered unfair by Mr Putin’s advisers. Frequent environmental checks on the Sakhalin-2 project began last year, a month after Shell announced a doubling in project costs to $20bn.

Oleg Mitvol, the deputy head of Russia’s state environment watchdog, Rosprirodnadzor, said he planned to sue Shell for $30bn in damages at the international arbitration court in Stockholm in March. Mr Mitvol has pledged to shut down the Sakhalin-2 project if alleged environmental damage is not rectified.

http://business.guardian.co.uk/story/0,,1970776,00.html

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