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Bloomberg: Gazprom to Pay Cash for Stake in Shell’s Sakhalin-2 (Update1)

By Torrey Clark

Dec. 20 (Bloomberg) — OAO Gazprom, Russia’s gas-export monopoly, will pay cash for a stake in Royal Dutch Shell Plc’s $22 billion Sakhalin-2 project, allowing the state-run company to enter the liquefied natural gas business while depriving Shell of reserves.

Gazprom will pay for the stake with cash rather than assets, an Energy Ministry spokesman said in Moscow today, citing Deputy Minister Andrei Dementiev and declining to elaborate. Gazprom Chairman Dmitry Medvedev, who is also first deputy prime minister, said last week that Gazprom may buy half of Sakhalin-2.

“Gazprom paying cash to Shell is good for everybody but Shell,” said James Beadle, head of research at Moscow based Pilgrim Asset Management. “Shell really needed to get new assets in return for those it surrenders.”

Sakhalin-2, the country’s last major foreign-owned energy project, has been hounded by regulators throughout Shell’s talks with Gazprom. A Sakhalin-2 stake will allow Gazprom, the world’s biggest gas company, to start LNG production with existing contracts to supply the supercooled fuel to Asian customers.

End of This Week

Shell Vice President Alf D’Souza declined to comment on the form of payment or the size of the stake. Executives of Shell have said they expect to reach an agreement with Gazprom by the end of this week.

Shell owns 55 percent of Sakhalin-2 and Mitsui & Co. and Mitsubishi Corp. of Japan own the rest. If Shell’s stake declines to 25 percent it could keep the company from achieving its reserve-replacement goal, Fitch Ratings Ltd. said yesterday.

The Anglo-Dutch company lost its top tier rating in 2004 after admitting it had overstated its reserves for years. Shell’s rating also depends on the price Gazprom pays for the stake and whether Shell keeps operational control of the project, including Russia’s first LNG plant, Fitch said.

An agreement with Gazprom could help end months of scrutiny by Russian authorities over environmental violations by Sakhlin- 2’s operator and contractors, said analysts including Valery Nesterov of Troika Dialogue in Moscow.

Mitsui and Mitsubishi have said they may each sell a 10 percent stake to Gazprom, reducing their holdings to 15 percent and 10 percent, respectively.

Shell and Gazprom last year reached a preliminary agreement for Gazprom to acquire 25 percent of Sakhalin-2 for half of Gazprom’s Zapolyarnoye field in the Arctic. Gazprom suspended those talks after Shell announced it was doubling its project costs for the current phase of the project to $22 billion.

To contact the reporter on this story: Torrey Clark in Moscow at [email protected] .

Last Updated: December 20, 2006 05:13 EST

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