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The Scotsman: Sakhalin deal may cut Shell reserves

By Tom Bergin

LONDON (Reuters) – Royal Dutch Shell Plc’s plan to cede a 30 percent stake in its biggest project to Russia’s Gazprom could force the oil major to slash its proven oil and gas reserves by around 10 percent, analysts said on Wednesday.

Under pressure from the Kremlin, Shell and its partners in the $22 billion (11.2 billion pound) Sakhalin-2 project have agreed to sell the stake in a deal expected this week, a source close to talks between the companies told Reuters on Tuesday.

Ratings agency Fitch warned that the reduction in Shell’s 55 percent share in Sakhalin-2 could hit the Anglo-Dutch company’s reserves bookings.

Shell, which is still struggling to restore investor confidence after cutting its proven reserves of oil and gas by around one-third in 2004, has not disclosed the level of reserves it has booked for Sakhalin-2.

However, U.S. regulatory filings for 2003, 2004 and 2005 list Sakhalin-2 first among the projects which Shell said contributed the most significant reserves additions.

The company also booked substantial reserves for the project in earlier years, analysts said.

“I would have thought there’s a billion barrels at least booked,” said one analyst who asked not to be named.

Another analyst said as much as 1.5 billion barrels of oil equivalent (boe) could have been booked — a figure which would represent over 10 percent of Shell’s 7.76 billion boe of proved reserves at the end of 2005.

Fitch said that Sakhalin-2 accounted for about 50 percent of Shell’s consolidated organic reserve replacement from 2003 to 2005.


Shell will receive cash and a promise of future cooperation with Gazprom in return for the 30 percent stake, the source close to the talks said on Tuesday.

The world’s second-largest fully-listed oil company by market capitalisation had earlier hoped to receive other assets in return for selling Gazprom a 25 percent stake.

An asset swap could have offset the impact on Shell’s reserves base.

The company is cash-rich but analysts see it as lacking sufficient investment opportunities. They also doubt the value of promises of further cooperation from the Russian gas giant.

Analysts expect 2006 to be another year when Shell has struggled to replace all the oil and gas it produced with new finds. The company failed to do so in 2004 and 2005.

These factors mean any reduction in booked reserves related to the Sakhalin transaction will have an especially pronounced impact on Shell’s reserves base.

“Even if a deal comes in January, it could still affect Shell’s reserves bookings and appear as a post-year-end event (in Shell’s 2006 results),” the first analyst said.

A third analyst questioned whether Shell was wise to have so aggressively booked reserves from the Sakhalin-2 project in recent years, especially given it knew in mid-2005 that it would lose around half its stake in the project.

Shell did not reply to requests for information on the reserves impact of the Sakhalin-2 deal.

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