The Moscow Times: Sakhalin Deal Seen This Week

Monday, December 18, 2006. Issue 3563. Page 7.
By Miriam Elder
Staff Writer

Shell and Gazprom are both confident that a deal on Sakhalin-2 will be reached this week, a Shell spokesman said Sunday after the project’s shareholders held talks with Russian officials.

The heads of Shell, Mitsui and Mitsubishi flew into Moscow for talks Friday in the latest sign that the companies were close to a final deal with Gazprom on its entry into Sakhalin-2.

“Both sides hope to reach a conclusion by the end of this week,” said Alf D’Souza, vice president for external affairs at Shell Exploration and Development.

Shell CEO Joroen van der Veer on Friday met with Gazprom CEO Alexei Miller and Industry and Energy Minister Viktor Khristenko for the second time in a week.

Mitsui president Shoei Utsuda and Mitsubishi president Yorijiko Kojima were also in Moscow on Friday, but spokesmen declined to provide details of their schedules.

The Japanese companies have said they will wait until project operator Shell concludes a deal with Gazprom before deciding whether to sell their own shares in the huge oil and gas project.

Khristenko will meet with the project’s shareholders again this week, his ministry said in a statement Saturday. The statement, posted on the ministry’s web site, confirmed that Khristenko had met with the three companies Friday.
 
Shell owns 55 percent of Sakhalin-2, Mitsui owns 25 percent and Mitsubishi owns the remaining 20 percent.

Gazprom chairman and First Deputy Prime Minister Dmitry Medvedev said last week that the firm was looking to acquire a stake of about 50 percent in the project.

A reported deal would see Shell reduce its holding to a blocking stake of 25 percent, while Mitsui and Mitsubishi would each cede 10 percent to Gazprom. The state-run gas giant would need 50 percent plus one share to gain control of Sakhalin-2, the world’s largest liquefied natural gas, or LNG, project.

An industry source said the presence of the Japanese officials meant the talks were reaching their conclusion. “This wouldn’t happen unless all sides were serious,” the source said.

Spokespeople for Shell and Gazprom declined to provide details of the meeting between Van der Veer and Miller.

“Both sides discussed Shell’s proposals regarding Gazprom’s entry into the Sakhalin-2 project,” Gazprom said in a statement.

“The talks have been proceeding in a constructive and positive way. All partners are keen to bring them to a rapid conclusion,” D’Souza said.

A Dec. 8 meeting between Miller and Van der Veer prompted speculation that after months of pressure from state officials, project operator Shell had devised a deal to hand over a major stake to Gazprom.

A putative deal in July 2005 foresaw Gazprom taking a 25 percent stake in Sakhalin-2 in exchange for giving Shell a 50 percent stake in Zapolyarnoye, a smaller field in western Siberia. Those talks were derailed when Shell increased the cost estimate for Sakhalin-2 to $22 billion. President Vladimir Putin has since said Russian companies should hold a controlling stake in all oil and gas projects on Russian territory.

“It looks like the negotiations by the operator, Shell, are done,” said Kaha Kiknavelidze, an oil and gas analyst at UBS. “They might just be signing documents now.”

Analysts have speculated that Gazprom might have offered Shell mostly cash for its stake in Sakhalin-2, while the British-Dutch company would prefer gaining assets in the country.

“This is not good news for Shell. Sakhalin-2 was a landmark project for them,” said Adam Landes, an oil and gas analyst at Renaissance Capital. “It won’t make that much of a difference to Gazprom’s valuation.”

The project is due to produce 9.6 million tons of LNG per year once it comes on stream next year, shipping to customers in Japan, South Korea and the United States. Gazprom, which currently produces about 550 billion cubic meters of gas per year, has no experience with LNG projects.

Shell-run project operator Sakhalin Energy warned last week that its production timetable could be thwarted by recently stepped up investigations into environmental damage at the site.

Tokyo Electric Power, Japan’s largest LNG importer, said Friday that it remained committed to a 22-year contract to buy 1.5 million tons of LNG per year from Sakhalin-2.

“We’ll continue holding the contract, although there may be minor delays in the project,” Tokyo Electric president Tsunehisa Katsumata told reporters in Tokyo, Bloomberg reported.

Japanese utility companies have agreed to buy about half of the gas output from Sakhalin-2, Bloomberg said.

European Commission President Jose Barroso weighed in Friday, saying he had raised the issue of Sakhalin-2 with Putin. “It’s a matter of concern for us what’s happening now in Sakhalin,” Barroso told reporters in Brussels.

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