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Times Online: Shell faces £138m charge to stay in Sakhalin

Royal Dutch Shell has agreed to pay an annual dividend to the Russian government to keep its stake in the lucrative Sakhalin II offshore project, it emerged today. The payment could be up to $275 million (£138 million).

April 26, 2007
Steve Hawkes

Anglo-Dutch giant has agreed to pay Kremlin an annual dividend to keep its stake in lucrative offshore project.

Shell and its partners in the field agreed the deal last week when the Kremlin-controlled gas giant Gazprom formally took a majority shareholding in the project.

The change in ownership saw Shell’s stake tumble from 55 per cent to 27.5 per cent.

The so-called priority dividend will be paid to the Russian government from 2010 onwards and will be linked to the oil and gas price.

The deal has effectively changed the terms of the production-sharing agreement (PSA) at Sakhalin II without formally revising the contract.

It reflects the Kremlin’s anger at huge cost overruns at Sakhalin II, one of the biggest gas fields in the world containing an estimated 18 trillion cubic feet. Oil reserves are put at 1.2 billion barrels.

Shell admitted two years ago that costs had spiralled to $20 billion and warned that first gas would not be produced until the summer of 2008, delaying revenues for the Kremlin.

A source quoted by The Wall Street Journal said the dividend agreed last week would be less than $1 billion. At that level, Shell would have to pay $275 million.

A Shell spokesman admitted there had been “minor adjustments to the fiscal terms” of the Sakhalin II contract.

“Whilst keeping the PSA intact these have given the Russian Federal Government more access to revenues when oil and gas prices are high.

“And they have taken the Russian Federal Government’s view on cost recovery allowances.”

He added “There is no material impact to the value of Sakhalin II for Royal Dutch Shell as a result of these negotiations.”

Gazprom paid $7.45 billion for a 50 per cent stake plus one share in Sakhalin II. Last week Chris Finlayson, head of Shell’s Russian operations, said: “I’d like to extend a warm welcome to Gazprom.

“This agreement is good news for Shell and all the shareholders in Sakhalin II.”

Alongside Shell and Gazprom, Mitsui and Mitsubishi own 12.5 per cent shareholdings.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article1708735.ece   

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