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Financial Times: Shell’s hopes for Sakhalin-2 resolution

By Neil Buckley and Arkady Ostrovsky in Moscow
Published: December 18 2006 00:32 | Last updated: December 18 2006 00:32

Royal Dutch Shell believes it could reach a deal to bring Gazprom, the Russian natural gas giant, into the Sakhalin-2 project by the end of this week, ending months of wrangling with Russian authorities over the $22bn development.

Jeroen van der Veer, Shell chief executive, flew to Moscow for talks with Alexei Miller, his counterpart from Gazprom, for a second successive Friday, and also met Viktor Khristenko, the Russian energy minister.

“The talks have been constructive and if everything proceeds smoothly we could have a conclusion by the end of the week,” said Alf D’Souza, a Shell spokesman in Moscow, on Sunday.

People familiar with the situation said last week that Shell had offered to cede majority control of the project to Gazprom, after a sustained assault on the development by Russian regulators. This weekend’s comments held out the prospect of the dispute being resolved by Christmas, or at least by the end of the year.

Majority control for Gazprom would reverse one of the most advantageous agreements secured by foreign energy companies in Russia in the 1990s.

Shell, which has a 55 per cent share in Sakhalin-2 – the largest foreign investment project in Russia – is understood to have offered to reduce its stake to 25 per cent. Mitsui and Mitsubishi, the Japanese companies that own 25 per cent and 20 per cent respectively, would sell 10 per cent each. Gazprom would emerge with 50 per cent plus one share.

Terms of the proposal have not been made public, but analysts have suggested Gazprom could pay about $4bn for a 50 per cent stake.

The chief executives of Mitsui and Mitsubishi were also in Moscow on Friday and met Mr Miller and Mr Khristenko.

Shell is understood to be pushing for a two-part agreement. One element would be a deal on Gazprom’s entry into the project. The other would be an agreement with the Russian government on an increased budget for the project and resolving the environmental charges brought against it.

The Shell-led Sakhalin Energy consortium developing Sakhalin-2 infuriated Moscow last year when it announced projected costs had doubled to $22bn.

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