RIA Novosti: Gazprom’s Sakhalin II involvement could affect Shell — Fitch

13:26 | 19/ 12/ 2006 

MOSCOW, December 19 (RIA Novosti) – International rating agency Fitch Ratings said Tuesday a mooted deal on the acquisition by Gazprom [RTS:GAZP] of a controlling stake in the vast Sakhalin II energy project in the country’s Far East would certainly benefit Russia’s energy giant, but could have a credit impact on Royal Dutch Shell.

Project operator Sakhalin Energy, in which the British-Dutch major holds a 55% stake and Japan’s Mitsui and Mitsubishi own 25%, and 20%, respectively, is developing the $22 billion oil and liquefied natural gas (LNG) project under a production-sharing agreement (PSA) with the Russian government, signed in 1994.

Gazprom’s board chairman and Russia’s first deputy prime minister, Dmitry Medvedev, said last week the sides were close to an agreement on Gazprom’s participation in Sakhalin II, adding that the company was considering all possibilities for joining the project, including investment or an asset swap.

Fitch said Shell’s stake in Sakhalin II is likely to decline to 25% from 55%, while Mitsui and Mitsubishi would both reduce their stakes to 15 % and 10% respectively, with Gazprom acquiring effective control of the venture.

The agency said gaining a stake in the project by state-controlled Gazprom “will further enhance the company’s business profile… and should help ease what has to date been considerable negative political pressure on the project’s development.”

Shell’s doubling of its project cost estimate to $22 billion has infuriated Russian authorities and scuttled a previous agreement on an asset swap that would have given Gazprom a 25% stake in Sakhalin II.

Sakhalin Energy saw months of intense pressure from Russian authorities accusing it of inflicting serious environmental damage to Sakhalin Island, including deforestation, toxic waste dumping and soil erosion.

In September, the Russian Natural Resources Ministry canceled its 2003 environmental approval of Sakhalin II. Russia’s environmental watchdog said that court proceedings on compensation for environmental damages, estimated at between $10 billion and $30 billion, would most likely begin in March 2007.

Fitch said a lawsuit for environmental damages is an important factor that could affect Shell’s credit profile.

“However, the credit impact on Shell will depend on the form and amount of consideration it will receive from Gazprom for a 30% stake, whether Shell will continue to maintain operational control given its technical expertise in large LNG projects, and the extent of changes to the hitherto very favourable terms of the respective production-sharing agreement it will need to accept as part of the transaction,” said Thomas Baumeister, Senior Director in Fitch’s Energy team.

“It will also hinge on the extent to which Shell will experience significant reductions in its inventory of proved reserves and on whether the Russian authorities will adopt a more accommodating attitude towards Shell, once control has been transferred to Gazprom,” he said.

Sakhalin II comprises an oil field with associated gas, a natural gas field with associated condensate production, a pipeline, a liquefied natural gas plant and an LNG export terminal. Most of the LNG from the project will be exported to Japan, which is seeking to diversify its energy imports.

The two fields have estimated reserves of 150 million metric tons (1.1 billion barrels) of oil and 500 billion cubic meters of natural gas.

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