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The Times: Sakhalin sale could dent Shell’s reserves

December 21, 2006
Carl Mortished, International Business Editor
Royal Dutch Shell faces a potential loss of oil and gas reserves from the cash sale to Gazprom of a stake in the Sakhalin-2 gas project.

Viktor Khristenko, the Industry and Energy Minister, is due to meet Shell today or tomorrow to discuss a cash transaction, Andrei Dementyev, Russia’s deputy industry and energy minister, said. 
A cash deal would be a disappointment for Shell, analysts suggested, because it is cash rich but opportunity poor. The vast reserves in the Sakhalin-2 project represented a significant boost to its portfolio.

Reports from Moscow suggested that Shell would hand over 30 per cent of Sakhalin-2 from its 55 per cent interest to Gazprom. Shell’s Japanese partners, Mitsui and Mitsubishi, would together supply a further 20 per cent to give Gazprom a majority.

John Rigby, of UBS, said: “If Gazprom only offers fair value and there is no other opportunity, then I don’t see the upside for Shell.”

Sakhalin-2 has huge value for Shell and Mr Rigby said it was wrong merely to focus on the rising costs of developing the project because there had been inflation in liquefied natural gas prices as well. “LNG prices have moved materially in the Asia-Pacific basin,” he said.

However, Shell may be forced to write down its oil and gas reserves to reflect its loss of barrels at Sakhalin. Fitch, the ratings agency, suggested yesterday that a reduction in Shell’s Sakhalin stake could affect its proven reserves.

The Dutch multinational is struggling to restore its reserves base after a severe writedown three years ago when the company was found to have misreported its oil and gas volumes.

Shell had hoped to bring the Russian utility into the project on the basis of an asset swap. The original transaction, agreed last year, involved Shell giving up a 25 per cent stake in Sakhalin to Gazprom in exchange for a half share in the Siberian gasfield Zapolyarnoye.The deal fell apart when Shell revealed a week later that the cost of the project had doubled from original estimates of $10 billion to $20 billion.

Since then, the Kremlin has mounted a campaign of threats, using an environmental protection agency, to force Shell into new negotiations over ownership of Sakhalin-2.,,13130-2513455,00.html and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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