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Royal Dutch Shell Plc: Gazprom enters Sakhalin II project

The shareholders of Sakhalin Energy Investment Company Ltd. (Sakhalin Energy), operator of the Sakhalin II project, today signed a Sale and Purchase Agreement with OAO Gazprom (Gazprom) to trigger the transfer of shares in Sakhalin Energy.
This transaction implements a protocol signed on December 21, 2006 in Moscow. Under its terms Gazprom acquires a 50% plus one share stake in Sakhalin Energy for $7.45 billion in cash.  The other three shareholders, Royal Dutch Shell plc (Shell), Mitsui & Co. Ltd (Mitsui) and Mitsubishi Corporation (Mitsubishi), each dilute their stakes by 50%, to receive a proportionate share of the purchase price.

Gazprom will now hold 50% plus one share, Shell 27.5%, Mitsui 12.5%, and Mitsubishi 10%.

With LNG capacity effectively sold, Sakhalin II is moving to firmly establish its position on the global energy map as a reliable new energy source for customers. Through the Area of Mutual Interest (AMI) arrangement with Gazprom, the prospects for expansion of Sakhalin II through further LNG processing trains are enhanced.

In addition, the Ministry of Natural Resources of the Russian Federation has announced its approval of the revised Environmental Action Plan (EAP).

Gazprom Deputy Chairman Alexander Medvedev said, “Gazprom’s entry into Sakhalin II is a powerful impetus for implementation of this large scale development in the area of energy export to Asia Pacific and North America. In turn, it will facilitate the company’s strategy of phased entry into the global LNG market.”

Shell’s Executive Director, Exploration and Production, Malcolm Brinded said: “Gazprom’s entry into the Sakhalin Project is warmly welcomed.  Combined with the government acceptance of the Environmental Action Plan, this is another important step for Sakhalin II. The AMI should create additional growth opportunities for the partners in the future.”

Mitsui’s Executive Director and Executive Vice President, Hiroshi Tada said: “Mitsui is pleased to welcome Gazprom to the Sakhalin II team. With the entry of Gazprom as Sakhalin Energy major shareholder, we are confident that in cooperation with the Russian Government, can bring this first Russian frontier LNG project to completion, as scheduled, for delivery of LNG to out customers in Japan, Korea and the United States. The milestone achieved today will no doubt contribute to further strengthening of the relationship between Russia and Japan, and will pave the way towards future development in Sakhalin region.”

Mitsubishi’s Senior Executive Vice President, Hisanori Yoshimura said: “Mitsubishi welcomes Gazprom into the Sakhalin II Project as a majority shareholder.  I trust that this new combination of shareholders is the best team to accomplish timely start-up of LNG delivery to important customers in Japan, Korea, and North American West Coast. This is an important step towards Sakhalin Energy becoming the key LNG supplier for Asia Pacific market.”
Notes for editors:

Sakhalin is a new world-class oil and gas province, with estimated resources of some 45 billion barrels of oil equivalent (boe). Sakhalin II is the largest integrated oil and gas export project in the world, with total resources of some 4 billion boe.

Sakhalin II today has production capacity of 80,000 boe per day during the production season. The subsequent phase of the development will take the total project capacity to 395,000 boe per day, including 9.6 million tonnes per year of LNG production.

The second phase of the project is over 80% complete. More than 17,000 workers are currently employed in the construction of the project, of which around 70% are Russian nationals. The planned LNG production has been sold under contract to customers across the Asia-Pacific region.

Sakhalin II includes the following elements:

Offshore production facilities including the Molikpaq platform (Piltun Astokh-A), the new Piltun Astokh-B and Lunskoye-A platforms and some 300 km of offshore pipelines;
An onshore processing facility to take the gas and crude oil from both fields;
 Onshore oil and gas pipelines to the south of the island; 
An oil export facility capable of year-round operation; 
The first LNG plant and associated export facilities built in Russia; 
Island infrastructure upgrades, such as roads, bridges, rail, port, airport, and medical facility upgrades.

Shell, Mitsui and Mitsubishi have entered into an Area of Mutual Interest arrangement with Gazprom that gives Sakhalin Energy and its shareholders priority for expansion, growth and new business opportunities in the wider Sakhalin area. This includes the purchase of third party gas and the bidding for, and acquisition of, certain blocks in the area.

The revised Environmental Action Plan (EAP) was prepared by Sakhalin Energy with input from shareholders and Gazprom and submitted to Ministry of Natural Resources in March 2007.  The revised document includes Sakhalin Energy’s measures to enhance contractor management for environmental impact during the onshore pipeline construction.  The revised plan sets out detailed action points, action parties and close-out dates.

The Sakhalin II EAP goes beyond the practical aim of merely addressing non-compliances during the pipeline construction.  It also provides targets and action points for conservation of biodiversity of Sakhalin Island, including fish stocks and rare flora and fauna species.

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