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The Moscow Times: Shell, Gazprom Close Book on Feud

Thursday, April 19, 2007. Issue 3640. Page 1.
By Miriam Elder
Staff Writer

Gazprom and Shell late Wednesday signed a protocol on the state-run gas giant’s entry into Sakhalin-2, closing the final chapter on months of uncertainty surrounding the world’s largest integrated oil and gas project.

“The path to today’s milestone was not easy,” Gazprom deputy CEO Alexander Medvedev said at a news conference at Shell’s Moscow offices.

Medvedev was flanked by the country managers of Sakhalin-2 shareholders Shell, Mitsui and Mitsubishi, as well as Ian Craig, head of project operator Sakhalin Energy.

Craig is due to step down in favor of a Gazprom manager as early as next year.

The understated ceremony stood in marked contrast to the fanfare at the Kremlin meeting in December, when President Vladimir Putin gathered the parties’ CEOs to announce that Gazprom would get a controlling stake in the project. It came after months of pressure from government officials.

Wednesday’s ceremony was held after two days of high-level meetings to wrap up details of the deal.

On Monday, the Industry and Energy Ministry, which oversees Sakhalin-2 as part of a production sharing agreement, approved a $19.4 billion budget for the project’s second phase, which is scheduled to run through 2014. Shell, until Wednesday the project’s majority shareholder, had requested a budget of $22 billion.
Medvedev insisted that the project’s PSA remained “intact.”

The budget had proven a major sticking point in negotiations between Gazprom and Shell.

A preliminary deal in July 2005 foresaw Gazprom taking a 25 percent stake in Sakhalin-2 in exchange for giving Shell equity in a smaller field in western Siberia, but the increased Sakhalin-2 budget, announced just weeks later, derailed those talks.

Gazprom paid $7.45 billion for a stake of 50 percent plus one share in Sakhalin-2, the project’s four shareholders said in a joint statement.

Shell, Mitsui and Mitsubishi each forfeited half of their holdings in the project. Shell now has a 27.5 percent stake, while Mitsui has 12.5 percent and Mitsubishi has 10 percent.

“I’d like to extend a warm welcome to Gazprom,” said Chris Finlayson, the head of Shell’s Russia operations. “This agreement is good news for Shell and all the shareholders in Sakhalin-2.”

The project had been plagued by allegations of environmental problems, which were estimated to have caused $5 billion worth of damage by the Audit Chamber.

Sakhalin-2 is the country’s first liquefied natural gas project, and seen as key to Gazprom’s entry into this lucrative market.

The Natural Resources Ministry, whose environmental agency had doggedly pursued Sakhalin Energy over purported environmental damage for months, approved the project’s environmental action plan Tuesday.

“Claims of damage can be applied only if the environmental action plan is not implemented and only then,” Medvedev said.

Putin said at the Dec. 21 Kremlin meeting that all environmental problems at the site had been resolved.

Craig, who flew in from Sakhalin Island for the ceremony, said the deal had ended a “period of uncertainty.”

“On behalf of Sakhalin Energy, I would like to welcome the world’s leading gas company as a majority shareholder,” he said.

Craig will be replaced as head of Sakhalin Energy once the project comes on line, with the first LNG shipments planned for 2008. The shareholder representatives said they expected no delay in shipments, which will serve Japan, Korea and the west coast of the United States.

“I will be sad to leave a company as challenging as Sakhalin Energy,” Craig said. The shareholders had “many times” handed over controlling stakes “to involve national companies” elsewhere, he said.

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