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Sunday Telegraph: Shell’s Sakhalin boss faces reshuffle axe

By Sylvia Pfeifer, Sunday Telegraph
Last Updated: 12:00am BST 08/04/2007

Royal Dutch Shell could lose management control of Sakhalin Energy, the Russian company which runs the giant Sakhalin project in eastern Siberia.

The loss would be a further blow to the Anglo-Dutch oil group and comes after Shell was forced to cede majority ownership of the company to Gazprom, the state-owned gas monopoly.

Until now, a Shell appointee – currently Ian Craig – has led the Sakhalin Energy consortium. Until last year it was made up of Shell and its Japanese partners, Mitsui and Mitsubishi, but under an initial agreement signed last December, Shell sold half its share plus half the stakes owned by the Japanese to Gazprom. It is understood that as part of the agreement, both Gazprom and Shell will now appoint executive directors. While there is expected to be a balance in the appointments – there are six directors – a Gazprom appointee could end up running the company. A final agreement is expected to be signed by the end of this year.

Loss of management control of Sakhalin, while not unexpected, would underline Gazprom’s dominant role in the consortium. The Russian company agreed in December to pay £3.8bn for a 50 per cent stake plus one share in the project. Analysts had warned any deal would impact on Shell’s oil and gas reserves; at its full-year results in February the company revealed that the partial sale of the stake would reduce its oil and gas reserves by 400m barrels. The change will, however, not take effect until December 2007 once the deal is completed.

The deal with Gazprom was reached after 17 months of negotiations in an increasingly hostile political environment. Industry executives at Western oil majors insist that they can still offer Russia a lot of technical and project management expertise, but concede that any new ventures will need to have a strong domestic partner.

Shell’s arch-rival BP has also been the subject of heavy political pressure in Russia. The company’s joint venture, TNK-BP, earlier this month took part in the controversial auction of some of the final assets of Yukos, the bankrupt Russian oil company. Although BP ultimately did not win any assets, some analysts said the company had only taken part in order to curry favour with the Kremlin and safeguard its assets in the country.

Despite Shell’s high-profile troubles in Russia, chief executive Jeroen van der Veer has won plaudits for steering the company through the reserves crisis that engulfed the company under his predecessor in 2004. As a sign of confidence in his execution, the board earlier this month extended his retirement date to 2009.

Other big investment bets, apart from Sakhalin, include an $18bn (£9bn) gas-field development and natural gas-to-diesel plant in Qatar. It is also putting a lot of investment into non-conventional forms of oil, notably its oil sands project in Canada. The company expects that 15 per cent of its oil and natural gas production will be from non-conventional sources by 2015, up from 5 per cent today.

Last week, van der Veer said the company would press ahead with feasibility studies in Iran. In January, Spain’s Repsol and Shell signed a preliminary agreement with Iran for a $10bn development of two phases of the huge South Pars natural gas field. In the past van der Veer has said investors should focus on Shell’s vast underlying resource base of 60bn barrels.

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