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The Times: Sakhalin-2 cut set to hit Shell’s expansion hopes

December 13, 2006
Carl Mortished, International Business Editor
 
The loss of a quarter of the Sakhalin gas project in Siberia will upset Shell’s strategy to boost oil and gas output, leaving a serious dent in the company’s planned expansion over the next two years, City investment analysts reckon.

The chairman of Gazprom, Dmitry Medvedev, who is also First Deputy Prime Minister of Russia, confirmed that Gazprom would take approximately half of Sakhalin-2 in exchange for cash and assets. 
 
Shell’s chief executive offered the giant Russian utility a controlling stake in the project on Friday in a bid to end a campaign of harassment conducted by the state environmental agency, which has threatened criminal prosecutions for alleged breaches of environmental law on Sakhalin Island.

Sakhalin-2, which is expected to export by 2008 about 9.6 million tonnes of liquefied natural gas per year to Japan, South Korea and the United States, would have boosted Shell’s output by 220,000 barrels per day.

Merrill Lynch estimates, however, that a reduction in Shell’s stake from 55 per cent to 25 per cent would cut the contribution to just 100,000 bpd. “A loss of 120,000 barrels per day of production as a result of this transaction would esentially see Royal Dutch Shell being ex-growth in exploration and production terms to the end of the decade,” Merrill Lynch said.

Shell declined to comment yesterday about the effect on its oil and gas output.

A spokesman said that the talks had not concluded and no single element of the proposed deal could be agreed in isolation. “Shell and fellow investors expect to be treated equitably,” the spokesman said.

Shell’s partners, the Japanese trading houses Mitsui and Mitsubishi, said that they would fall in line with the oil multinational but asked Russia to prove its “credibility” by keeping gas deliveries on schedule.

Shell nor Gazprom would not comment on the price that the Russian utility would pay for its half-share in the asset.
 
http://business.timesonline.co.uk/article/0,,13130-2501290,00.html

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