UpstreamOnline: Sakhalin deal ‘will hit Shell reserves’

By Upstream staff

Anglo-Dutch supermajor Shell’s chief executive Jeroen van der Veer said that the sale of half the company’s interest in Russia’s Sakhalin 2 project to Gazprom would have an impact on its reserves.

“Of course there’s a short-term impact on the reserves, the reserve bookings themselves, but when I look at the future of the company, we have really good opportunities,” Van der Veer told Reuters after sealing the deal in Moscow.

Gazprom will pay a total of $7.45 billion to Shell and its Japanese partners Mitsui and Mitsubishi to become the leader of the $22 billion project.

But analysts had said Shell’s decision to take cash for 27.5% of Sakhalin 2 instead of insisting on an asset swap might be a misstep. One described it as the “worst case scenario”, since Shell needs new reserves.

“I disagree with that,” Van der Veer said in a telephone interview. “We have been in negotiation for two years about a swap. It was all very complicated. By going to cash, we could make a lot of progress. Speed is of importance. We have a strong consortium with Gazprom.”

Gazprom had originally offered Shell a share of its Zapolyarnoye field as a swap for 25% of Sakhalin 2, based on Sakhalin Island off Russia’s Pacific coast.

But last year Shell announced the project’s costs had doubled, prompting Gazprom to reopen negotiations and demand a much bigger share.

“If I look at Shell’s position, we have more than enough opportunities in our company, so that is not a problem at all,” Van der Veer said.

Shell felt it was important to get stability for Sakhalin 2, the world’s biggest liquefied natural gas project, and to ensure it was completed on time.

“But I don’t like to have a technical debate now about proven reserves,” Van der Veer said.

Shell stands to get a total of $4.1 billion from Gazprom, since the cash would be shared between the project partners in proportion to their shareholdings.

But there was no extra cash to cover the huge project costs, which amounted to $12 billion by the end of the third quarter of 2006.

Van der Veer described it as “ground floor terms” for Gazprom, as if the huge Russian gas monopoly had been a shareholder in the project since the mid-1990s.

“Gazprom pays as if it has been a shareholder from the beginning, but including compensation for the time value of the money,” explained Shell’s exploration and production boss Malcolm Brinded.

“And, of course, we also have potential value from the AMI (areas of mutual interest), which covers growth opportunities in Sakhalin. And the fact that we’ve got the project on a sound footing for timely completion for growth into the future.”

Brinded said Shell would see its cash as soon as the deal closed, which would be “as soon as all the agreements can be detailed and signed”.

“It’s a normal legal process, so it’s weeks or months, not too long,” he said.

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