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Reuters: UPDATE 2-Shell CEO in Moscow in search of Gazprom deal

Fri Dec 15, 2006 6:40 AM ET
(Adds sources on “road map”, outlook for talks)
By Tom Miles and Douglas Busvine

MOSCOW, Dec 15 (Reuters) – Royal Dutch Shell CEO Jeroen van der Veer met Gazprom chief Alexei Miller on Friday in Moscow to discuss admitting the Russian gas monopoly to the Sakhalin-2 project, Gazprom said.

The heads of Shell’s two Japanese partners in the project — Mitsui’s <8031.T> Shoei Utsuda and Mitsubishi’s <8058.T> Yorihiko Kojima — were also in Moscow for talks, spokesmen for both companies said in Tokyo.

One source familiar with the matter said the bosses may set out a “road map” to guide talks on a deal for Gazprom to acquire a stake in Sakhalin-2, the world’s largest liquefied natural gas project, that would be finalised in the New Year.

“It’s most likely to be something that gets more intense as we get into January,” the source said. “Both sides want to find a solution and both want to work with each other.”

A Shell spokesman declined to comment. Gazprom said in a brief statement that executives had met and discussed Gazprom’s participation in Sakhalin-2, which is due to come onstream in 2008 and supply consumers in Asia and North America.

Van der Veer’s visit is his second to Moscow in a week and is the latest signal that the two sides, and the Japanese partners, may be nearing a broad agreement on the $22 billion venture.

After last Friday’s meeting between the heads of the two firms, industry sources told Reuters that Shell had offered to let Gazprom take a contolling stake in Sakhalin-2, the largest single foreign investment in Russia.

This week Gazprom’s chairman, Russia’s First Deputy Premier Dmitry Medvedev, confirmed the company wanted to get a stake of around 50 percent. Energy Minister Viktor Khristenko said a deal could be done in the first quarter of next year.

A Kremlin source said he was not aware of any planned meeting between Van der Veer and President Vladimir Putin. Such face-to-face meetings often signal that a major deal has won official blessing.


A second source familiar with the talks also expected the bosses to agree on a plan of action targeting a deal in the first quarter. “That’s how it looks, and there is goodwill on both sides,” the source told Reuters.

Under the proposed deal, Shell would cede up to 30 percent out of its 55 percent holding. Mitsui and Mitsubishi may each sell 10 percent of their respective stakes of 25 percent and 20 percent, enabling Gazprom to secure a bare majority.

Russian officials have put Shell under pressure since it doubled its cost estimate for Sakhalin-2 last year, wrecking a preliminary asset swap deal with Gazprom.

The escalation of the costs infuriated the Kremlin, which will now have to wait much longer before it sees any royalty payments from the project’s production sharing agreement, signed back in the 1990s.

Russia’s Natural Resources Ministry and environmental officials have threatened the project with administrative sanctions, the withdrawal of key permits and damages claims of up to $30 billion.

Sakhalin Energy, the Sakhalin-2 operating company, said earlier this week that the activities of Russian officials were now threatening to cause the entire project timetable to slip.

Shell has said it wants any agreement to tie up all the loose ends at once, implying it plans to seal its budget, terms for Gazprom’s entry and also a ceasefire in the rhetorical onslaught from Russian officials.

The sources said it would be key for Russia to ease the official pressure on Sakhalin Energy so that both sides can hammer out a satisfactory business deal in good faith. (Additional reporting by Dmitry Zhdannikov in Moscow and Osamu Tsukimori in Tokyo) 
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