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Bloomberg: Shell Accepts $3.6 Billion Cut in Sakhalin-2 Recovery (Update1)

By Torrey Clark

Dec. 28 (Bloomberg) — Royal Dutch Shell Plc and its Japanese partners will take on $3.6 billion of costs themselves to develop the Sakhalin-2 oil and gas project in Russia, lowering the amount state-run OAO Gazprom will spend to join the project and the hastening the state’s share in the profit.

Sakhalin-2’s stage-two budget may be approved at $19.4 billion, less than Shell had sought. The amount includes $3.6 billion the foreign shareholders will spend without getting tax relief, Deputy Energy Minister Andrei Dementiev told Moscow-based Vedomosti newspaper in remarks confirmed by the ministry’s press office today.

Shell, Mitsui & Co. and Mitsubishi Corp. agreed Dec. 21 to sell half their stakes in Sakhalin-2 to Gazprom for $7.45 billion in cash, bolstering President Vladimir Putin’s dominance in the world’s biggest oil and gas industry. The deal ended a yearlong campaign in which the government threatened to cancel building permits on environmental grounds and refused to approve requests to double the project’s investment plan.

“This is a present to Gazprom, which will benefit from that investment without participating in it,” said Denis Borisov, an oil and gas analyst at Solid Investment & Financial Co. in Moscow.

The budget estimates may change further before the government approves it in the first quarter of the year, Dementiev said. Under a so-called production-sharing agreement, the investors recover approved costs before the government shares in the profit.

Increased Budget

Shell sought to double the budget for Sakhalin-2’s second stage to $20 billion last year, less than two weeks after agreeing on an asset swap that would give Gazprom a quarter of the project.

Sakhalin Energy has already completed the first stage of the project at a cost of about $2 billion and invested $12 billion in the second stage, which is scheduled for completion in 2014.

Shell spokesman Maxim Shoob declined to comment on the budget numbers, citing confidentiality.

Gazprom spokesman Sergei Kupriyanov said he knows of the agreement between the shareholders and the ministry. He declined to confirm or deny details of the accord. Gazprom will invest in the project in proportion to its interest as a majority shareholder, he said Dec. 22.

Shell’s shares fell 9 pence, or 0.5 percent, to 1,794 pence in London as of 10:57 a.m. Gazprom’s shares gained 1.29 rubles, or 0.4 percent, to 303.25 rubles.

To contact the reporter on this story: Torrey Clark in Moscow at tclar[email protected] .

Last Updated: December 28, 2006 06:30 EST

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