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The Wall Street Journal: Gazprom Takes Reins of Project Shared With Shell

April 19, 2007

MOSCOW — Russian gas monopoly OAO Gazprom yesterday formally took control of the huge Sakhalin-2 oil and gas development, as a $19.4 billion budget for the second stage of the project was approved.

As part of an agreement hammered out in December, Gazprom and Royal Dutch Shell PLC signed a deal that gives the Russian company a 50%-plus-one-share stake in the project’s operator Sakhalin Energy in exchange for $7.45 billion in cash. As a result, Shell’s stake is halved — to 27.5% — as are the holdings of Japanese companies Mitsui & Co. and Mitsubishi Corp., which now own 12.5% and 10%, respectively.

“Gazprom’s entry into Sakhalin-2 is a powerful impetus for implementation of this large-scale development in the area of energy export to Asia Pacific and North America,” Gazprom Deputy Chief Executive Alexander Medvedev said. “In turn, it will facilitate the company’s strategy of phased entry into the global liquefied natural gas market,” he added.

LNG production at Sakhalin, an island off Russia’s Pacific coast, is expected to begin next year, at which time Gazprom plans to appoint a new head of Sakhalin Energy to succeed current Chief Executive Ian Craig, Mr. Medvedev said. Mr. Craig’s contract was due to expire when the plant comes online.

Gazprom had originally planned to take a 25% stake in Sakhalin-2 under an asset-swap deal that would have given Shell a stake in another project in Siberia. That transaction faced difficulty, however, when Oleg Mitvol, deputy head of Russian environmental watchdog Rosprirodnadzor, threatened to pull the venture’s environmental permit in September following a series of checks.

Mr. Mitvol’s investigation was perceived by analysts as a way to support a Gazprom takeover of the energy project. Prior to that, the venture had already faced setbacks soon after Shell announced in July 2005 that the project’s costs would double to $20 billion — an inflated budget that required agreement from the Russian government.

The four companies also yesterday approved a new budget of $19.4 billion covering the second stage of the Sakhalin-2 project, which runs until 2014.

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