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Bloomberg: Sakhalin Sale May Hurt Shell’s Reserves, Fitch Says (Update1)

By Stephen Voss

Dec. 19 (Bloomberg) — Russia’s proposed acquisition of a majority stake in the Royal Dutch Shell Plc-led Sakhalin-2 oil and natural-gas project may hurt Shell’s goal of replacing reserves, Fitch Ratings Ltd. said.

Shell executives have said they expect to reach an agreement to give state-run energy company OAO Gazprom a controlling stake in the $22 billion project in Russia’s Far East by the end of this week, following months of scrutiny from Russian authorities over environmental violations.

“Any significant loss of future production volumes and reserves under a renegotiated production-sharing agreement could be detrimental to Shell’s efforts to catch up with its peers with respect to reserve replacement and reserve life,” said the report by Thomas Baumeister, a senior director on Fitch’s energy team.

The impact on Shell’s credit rating also will depend on how much Shell is compensated for reducing its stake and whether the Anglo-Dutch company maintains operational control of the project, including Russia’s first liquefied natural gas export terminal, the report said.

Fitch rates Shell’s senior unsecured debt at AA+, its second-highest rating. Its outlook on the grade is stable, indicating a change isn’t likely soon.

The Sakhalin-2 project is Shell’s fourth-largest development project out of nine, both in terms of its reserves of 1.398 billion barrels of oil equivalent, and its net present value of $4.85 billion, according to Fitch.

Japanese Partners

Fitch based its analysis on the assumption Shell’s stake in Sakhalin-2 would drop to 25 percent from 55 percent and Shell’s two Japanese partners, Mitsui & Co. and Mitsubishi Corp., would reduce their stakes to 15 percent and 10 percent, respectively, giving Gazprom control of the venture.

The pace at which major oil companies are able to replenish the reserves they produce is “an important parameter to evaluate long-term growth prospects,” the Fitch report said.

Shell lost its top tier credit rating and ousted its chairman in 2004 after admitting it had overstated the size of its reserves for years. Shell Chief Executive Jeroen van der Veer told investors in May that rising costs for materials and contractors means it is “less likely” Shell will meet an earlier goal of raising its rate of replacing proven reserves to 100 percent for the five-year period ending 2008.

Reserve Replacement

Shell replaced about 67 percent of its proven reserves last year, versus 95 percent at rival BP Plc, under U.S. Securities and Exchange Commission guidelines. Shell says some of its newer projects, such as oil sands and gas-to-liquids projects, can’t easily be booked as “proven” reserves under SEC rules.

Shell named Sakhalin as one of two places where it expanded proven reserves the most last year, adding that it expected to extract those reserves later this decade.
“The most significant 2005 additions in proved reserves arose from new sales agreements and modifications to development plans covering gas volumes to be produced from the Sakhalin development in Russia and the recognition of volumes associated with the further development of the Kashagan field in Kazakhstan,” Shell said in its 2005 annual report in April.

To contact the reporter on this story: Stephen Voss in London at [email protected]
Last Updated: December 19, 2006 05:09 EST

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