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Reuters: UPDATE 4-Shell CEO in Moscow in search of Gazprom deal

Fri Dec 15, 2006 11:27 AM ET
(Adds supervisory board clear 2007 budget)
By Tom Miles and Douglas Busvine

MOSCOW, Dec 15 (Reuters) – The heads of Royal Dutch Shell and Gazprom met for the second time in a week on Friday, a signal they could be nearing a deal to allow the Russian gas monopoly to join the $22 billion Sakhalin-2 project.

One source familiar with the matter said the talks may set out a “road map” to guide negotiations 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.”

Neither Shell nor its Sakhalin-2 partners — Japan’s Mitsui <8031.T> and Mitsubishi <8058.T>, whose chief executives were also in Moscow — disclosed any details of the talks.

In a brief statement, Gazprom said only that its chief executive Alexei Miller met Shell CEO Jeroen van der Veer to discuss Gazprom’s participation in Sakhalin-2, which is due to come on stream in 2008 and supply Asia and North America.

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

Chris Weafer, chief strategist at Alfa-Bank, said the key questions were the valuation of the project and what Gazprom would offer Shell in return for a stake in Sakhalin-2.

Originally Shell was to accept a stake in Gazprom’s Zapolyarnoye field, but industry sources have said it no longer wants that. Weafer said he understood Gazprom was now offering a smaller stake in Zapolyarnoye, but Shell wanted other assets with greater potential and a clearer development timetable.

“They’re obviously holding out for something better,” Weafer said. “But not cash. They really can’t afford to reduce their involvement in Russia.”

Gazprom’s chairman, Russia’s First Deputy Premier Dmitry Medvedev, this week confirmed the company wanted a stake of around 50 percent and Energy Minister Viktor Khristenko said a deal could be done in the first quarter of next year, raising hopes that an end to the lengthy negotiations was in sight.

In a confidence-boosting step, Khristenko’s ministry said on Friday that Sakhalin-2’s 2007 budget and works programme of $1.17 billion had been approved. Khristenko also met van der Veer, but no details of their meeting were disclosed.

A Kremlin source said he was unaware of any plan for van der Veer to meet President Vladimir Putin. Such face-to-face meetings often signal 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 the preliminary Zapolyarnoye swap agreement with Gazprom.

The escalation of the costs infuriated the Kremlin, which will now have to wait longer for royalties from the project’s production sharing agreement, signed in the 1990s.

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

“Some time back it became quite clear that Shell had no choice but to do a deal with Gazprom. If they didn’t, Sakhalin-2 would be shut down,” Weafer said.

“The priority for the government is certainly the restructuring of ownership rather than getting these projects under way.”

Officials’ zealous pursuit of Shell prompted a diplomatic row, with several foreign governments demanding an explanation from Russia. European Commission President Jose Manuel Barroso said on Friday he was also keeping an eye on Russia’s behaviour. “It’s a matter of concern for us what is happening in Sakhalin,” Barroso told a news conference on Friday.

Sakhalin Energy, the Sakhalin-2 operating company, said earlier this week 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, Osamu Tsukimori in Tokyo and Jeff Mason in Brussels)
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