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Reuters: Gazprom takes Sakhalin-2 lead ceded by Shell

Wed Apr 18, 2007 5:12 PM BST
By Tanya Mosolova

MOSCOW, April 18 (Reuters) – Russian gas monopoly Gazprom (GAZP.MM: Quote, Profile , Research) has completed a deal to take 50 percent plus one share in the Sakhalin-2 oil and gas project formerly led by Royal Dutch Shell (RDSa.L: Quote, Profile , Research), the firms said on Wednesday.

Gazprom agreed last December to buy control in the project for $7.45 billion, seen by analysts as a knock-down price, and the firms said they hoped to complete the details in the first quarter of this year.

After the final talks got bogged down in red tape and government protocol, they finally signed the deal on Wednesday.

“We will start nominating executives tomorrow,” Gazprom’s deputy chief executive Alexander Medvedev said at a news conference after the deal was signed.

He said the new appointees, including a chief executive who would be appointed before the project’s launch next year, would not necessarily come from Gazprom.

Sakhalin-2 is one of only three production sharing agreements (PSAs) in Russia’s energy sector. The PSA deal allows the project to recoup capital costs from the project’s revenues before sending any royalties to the state.

Under Shell-led management, the projected costs doubled to $22 billion, infuriating Russia’s government and forcing Shell into months of negotiations, during which the state-controlled gas monopoly persuaded it to let it have a controlling stake.  

Russia’s Energy Ministry said on Wednesday that the supervisory board of the PSA had approved $19.4 billion of reimbursable costs for the second phase up to 2014. The cost of the first phase was $2 billion, meaning the project will recoup a total of $21.4 billion of costs.

Shell and its Japanese partners Mitsui (8031.T: Quote, NEWS , Research) and Mitsubishi (8058.T: Quote, NEWS , Research) each gave up half of their stakes in the project to bring Gazprom on board, leaving them with 27.5 percent, 12.5 percent and 10 percent respectively.


The deal followed 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 industry.

The head of Shell in Russia, Chris Finlayson, said the negotiations with the government had left the PSA intact and no material changes in profitability for Shell. He also said there would be no slippage in the project schedule.

“No, absolutely not,” he said, adding that Gazprom’s entry into the project would improve the chances of keeping to the existing schedule, which foresees the first delivery of liquefied natural gas (LNG) in summer 2008.

Sakhalin-2 is the world’s biggest LNG project, with two production trains each capable of producing 4.8 million tonnes of the liquefied fuel a year.

Almost all the projected output has already been sold to buyers in Japan and South Korea, which rely on fuel imports for electricity production.

Finlayson said he had previously said it might be possible to add a third or even a fourth train, and said it still might be possible to double the project’s capacity.

“The entry of Gazprom raises the chance of realising the third train,” he said

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