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Reuters: UPDATE 1-Gazprom to close Sakhalin-2 deal with Shell

Mon Apr 16, 2007 7:56 PM BST
(Adds talks broken off, agreement expected on Tuesday)

MOSCOW, April 16 (Reuters) – Russia’s gas monopoly Gazprom is expected to agree on Tuesday a $7.45 billion deal to buy half of the Sakhalin-2 project from Shell and its partners, industry sources said on Monday.

The sources had earlier said a deal was likely on Monday but talks broke off late in the evening without it being finalised.

A preliminary deal was agreed in December after months of pressure on the project by Russian environmental authorities and was interpreted by analysts as yet another step in the Kremlin’s drive to win more control over Russia’s huge energy sector.

Gazprom will pay cash to Royal Dutch Shell and its Japanese partners Mitsui <8031.T> and Mitsubishi <8058.T>, becoming the leader of the project.

Shell will continue to contribute to management and act as technical adviser on Sakhalin-2, which will honour its existing contracts to sell liquefied natural gas to Japan, South Korea and the United States according to the agreed schedule, with the first shipment due in the summer of 2008.

The deal means Shell and its Japanese partners will each dilute their stakes by half, leaving them with 27.5 percent, 12.5 percent and 10 percent, respectively.

Gazprom had originally offered Shell a share of its Zapolyarnoye field as a swap for 25 percent of Sakhalin-2, based on Russia’s Pacific energy hub, Sakhalin Island.

But when Shell announced in 2005 that the cost of phase two of the Sakhalin-2 project had doubled to $20 billion, Gazprom reopened negotiations and demanded a much bigger share.

The cost hike also angered the Kremlin, since under the project’s production sharing agreement the operator can recoup costs before sharing any profit with the state. Higher costs mean Russia waiting longer for less profit.

Shell had initially asked Russia to allow it to spend $22 billion on Sakhalin-2 from the previously approved $12 billion.

Russian officials said in December they would clear the project’s costs to 2014 at $19.4 billion, but only some $15.8 would be redeemed.

They also said Shell and its Japanese partners would spend $3.6 billion out of their own pockets as Russia believes they could have avoided those costs.

The three firms would have to split this extra cost between themselves according to their previous stakes of 55, 25 and 20 percent respectively.

Shell has said Gazprom would not cover any of the $12 billion cost, registered as of the end of third quarter 2006.

Industry sources said the deal to be sealed on Monday retained the original terms agreed in December, but declined to give details.
© Reuters 2007. All rights reserved

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