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Daily Mail: Shell ousted as Putin tightens grip

Sam Fleming,
22 December 2006

Vladimir Putin strengthened his iron grip on Russia’s energy industry by wresting control of the world’s biggest oil and gas project from Royal Dutch Shell.

State-run gas giant Gazprom bought a controlling stake in the vast Sakhalin-2 scheme for £3.8bn after Shell became hopelessly bogged down in environmental disputes and cost over-runs.

Shell’s stake will drop from 55% to 27.5%, while Gazprom will secure 50% of the project plus one share. Shell’s Japanese partner Mitsubishi’s holding will fall to 12.5%, while Mitsui’s drops to 10%.

The deal means that Russia is now marching towards control of every large energy project in the country – though at the cost of severely damaging its reputation as a place to do business. The treatment of Shell led to diplomatic protests and strengthened fears that Gazprom is more a political tool than a reliable energy supplier.

Shell had a preliminary agreement allowing Gazprom to join the Sakhalin venture in the north Pacific in exchange for assets in Siberia. But this fell apart after Shell announced £5.1bn of cost overruns on the project. Russia complained this would mean it gets less revenue under the production sharing agreement it signed in the 1990s. A year-long stand-off followed, culminating in a regulatory assault over environmental violations.

Gazprom will now secure valuable technology and a major toehold in the east Asian energy market without giving up a barrel of oil or gas. Russia’s concerns about ecological damage from the £10.2bn project may now evaporate. The Energy Ministry said the parties have agreed to ‘jointly resolve all outstanding issues.’

Jason Kenney, an analyst at ING, said having a ‘behemoth like Gazprom onside’ should mean any red tape is torn to shreds. Unfortunately Shell shot themselves in the foot by increasing capital expenditure and destroying value, so they get cash and no additional resources in Western Siberia. But they do have the upside of finally getting this thing moving.’

Shell chief executive Jeroen van der Veer called the deal ‘an important step forward.’

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