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The Guardian: Sakhalin issues ‘settled’ – as Russia takes 50% stake

Environmental problems vanish with handover Putin gives backing minutes after deal

Simon Bowers
Friday December 22, 2006

Vladimir Putin has declared that the environmental questions surrounding the Sakhalin-2 oil and gas project have been settled – just minutes after state-controlled Gazprom took control of the $22bn (£11bn) operation from Shell in a deal mired in controversy.

“As far as I’ve been informed, the fundamental issues can be considered resolved,” the president was quoted as saying by the Interfax news agency. “Russia is satisfied by a serious and businesslike approach of the partners.” His comments came after he met officials from Gazprom and Sakhalin-2’s shareholders, Shell, Mitsui and Mitsubishi. He played down the Kremlin’s role in negotiations, insisting Gazprom’s “decision to participate … was a corporate decision”.

Gazprom will pay £3.8bn to gain a stake of 50% plus one share in the Sakhalin Energy Investment Company, while the three founding groups will have their interests halved. Shell will receive $4.1bn (£2.1bn) for ceding control of the project. Its holding will be cut from 55% to 27.5%.

The Anglo-Dutch group last night appeared to give the deal a conspicuously cool reception. “It is an acceptable outcome ending a period of uncertainty for Sakhalin-2,” a spokesman said.

Negotiations over the long-expected deal proved controversial after the Sakhalin-2 project, based on Russia’s far eastern Sakhalin Island, attracted heavy criticism from Russian environmental regulators. Allegations of environmental violations threatened to halt the scheme and land the shareholders with fines of up to $30bn.

These criticisms were vigorously denied by Shell and the Sakhalin-2 management, which described some allegations from regulators as “unsubstantiated attacks containing exaggerations and distortions”.

Shell had infuriated the Kremlin last year when it said costs at Sakhalin-2 were likely to double to $22 billion. This substantially delayed the date from which Russia expected to see a return from the fields. The original deal struck with Shell gave it the right to recover all its costs before sharing any profits.

Shell said last night in a separate statement that the controversial cost increase had been discussed in detail with the Ministry of Industry and Energy. It said the higher budget was expected to be officially approved shortly.

The Kremlin’s renewed confidence in Sakhalin-2’s environmental policies came despite news that Gazprom would leave substantial management and technical advisory roles to Shell, which is the global leader in liquefied natural gas, an important component of the Sakhalin-2 project.

Many analysts had predicted a cash payoff for Shell would be the “worst case scenario” and last night a spokesman conceded the deal would hit the group’s reserves position and, in all likelihood, its production outlook.

But some analysts last night suggested Shell could have come off a lot worse. “It’s better than some of the speculation we saw a week ago. The market had already anticipated an event of this magnitude so it’s unlikely to have a big impact on the share price,” said Richard Griffith at Evo Securities.

Gazprom had originally offered Shell a share of its Zapolyarnoye field as a swap for 25% of Sakhalin-2. But Shell’s announcement of spiralling costs at the project strengthened Gazprom’s hand, prompting the monopoly gas group to demand a much bigger share.

Sakhalin-2 is the world’s largest integrated oil and gas project with total resources of about 4bn barrels of oil equivalent. Current daily production capacity is 80,000 barrels but the next phase of development at the site will take this to 340,000 barrels, including 26,000 tonnes of liquefied natural gas.

Last night Gazprom chief executive Alexei Miller said: “We as the main shareholder of the project will do everything to launch it as soon as possible.” Under its new ownership, Sakhalin-2 has pledged to honour contracts to sell liquefied natural gas to Japan, South Korea and the United States according to an agreed schedule, with the first shipment due in the summer of 2008.

Separately, Gazprom, which is the world’s largest gas producer, said yesterday its first half profits had more than doubled from 154bn roubles (£3bn) to 332bn roubles (£6.4bn), well in excess of expectations.


The Sakhalin-2 project is due to start operations in 2008 and involves finding and producing oil and gas near Sakhalin island, which was a penal colony during the tsarist and Soviet eras. The two fields of Sakhalin-2 have an estimated 1.2bn barrels of oil and 500bn cubic metres of natural gas. The gas is to be brought ashore, cooled until it is liquefied and then shipped to Japan and elsewhere. The scheme created almost immediate controversy with western conservation groups because it involves putting equipment close to breeding grounds of endangered grey whales. There has also been criticism that sensitive salmon fishing areas are being affected by the dumping of waste.,,1977430,00.html and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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