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RIA Novosti: Debates around Sakhalin II over

20:16 | 26/ 12/ 2006 

MOSCOW. (RIA Novosti political commentator Alexander Yurov) – The urgent visit to Moscow of top executives from companies that are participating in the Sakhalin II project and their meeting with Russian President Vladimir Putin ended with mutual satisfaction.

Royal Dutch/Shell, Mitsui and Mitsubishi agreed to let the Russian gas giant Gazprom joint the project. The sum they are to receive for it is unexpectedly big, $7.45 billion.

Of course, the agreement did not come easy, which is hardly surprising given that at stake was control over 150 million tons of oil and 500 billion cu m of gas – that much is held by offshore reserves developed by international consortium Sakhalin Energy, the project’s operator.

This project was launched over ten years ago. Under a product-sharing agreement signed in 1994, its participants were given access to Russian reserves in exchange for a share of their profit, which Russia will start receiving after the operator pays off all of its costs for field development and infrastructure construction. It was planned from the very beginning that work under the project will be enormous.

The project envisaged the construction of a gas pipeline stretching from north to south across the island of Sakhalin, of the first in Russia LNG plant with a capacity of 9.6 million tons of liquefied natural gas annually, and of a major oil terminal.

First crude was to be produced in 2006, and the projected capacity reached in 2008, yielding up to 8 million tons of oil and over 9 million tons of LNG annually. Remarkably, future gas from the fields is already contracted by consumers.

From the very beginning, the project included three large foreign companies – Royal Dutch/Shell (55%), and Japanese Mitsui (25%) and Mitsubishi (20%). Now they will give up half of their stakes each in favor of Gazprom that will join the project. As a result, the Russian gas giant will receive over 50% of stakes in Sakhalin Energy, the project’s operator.

Functions of the project’s participants will remain unchanged. Sakhalin Energy will remain the operator, Royal Dutch/Shell will provide technical consultations and will continue taking part in the project management. Gazprom will be playing the leading role, of course. This means that potential consumers will receive gas and oil from Sakhalin II on time.

In October, the situation around Sakhalin Energy seemed hopeless. The Russian environmental authorities exposed serious violations committed when developing offshore fields. The government was also dissatisfied with the growing costs of the project. Now, however, these difficulties have become a thing of the past.

The stir around Sakhalin II will now most probably fade. The Russian authorities agreed to a surge in the project’s costs. Gazprom’s joining the list of Sakhalin Energy shareholders is a promising factor for potential LNG consumers. The Russian company will be the guarantor that the already signed contracts will be honored.

Naturally, Gazprom is not joining the project for free. It will pay $7.45 billion for the stake. Yet the issue of Sakhalin Energy’s appraisal by the Russian authorities still worries analysts. A few days ago Gazprom was expected to offer no more than $6 billion for its stake, which seemed logical as the company was assessed at around $10 billion. The sum offered to the foreign firms came as a surprise and was, in fact, a broad gesture.

According to available information, the gas giant did not ask for delays in payment and said it was ready to pay at once. Apparently, it decided to increase the price of the stake to reimburse the foreign participants for the moral damage. 

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