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The Times: Shell enters alliance with Rosneft as Russia acts to lure investment

July 10, 2007
Steve Hawkes

Shell has struck a groundbreaking partnership in Russia seven months after it was forced to surrender control of the country’s vast $21 billion (£10.4 billion) Sakhalin-2 offshore development.

The Anglo-Dutch group said yesterday that it had entered into a broad alliance with Rosneft, the Kremlin-backed oil giant, to cooperate on oil and gas projects in the country. The agreement mirrors a separate deal being thrashed out between Gazprom, the Kremlin’s favoured gas group, and BP.

Gazprom picked up the majority stake in Sakhalin-2 after Russian regulators threatened to freeze development work being carried out by Shell and its minority partners. Analysts said that Shell’s agreement with Rosneft was a significant coup for the British group and signalled that it could play a key role in the development of a string of lucrative oil and gasfields in eastern Siberia.

The Russian Government is poised to auction off the rights to dozens of fields in the region, including Chayandinskoye, which is thought to hold more than three billion barrels of oil and gas reserves. Christopher Granville, the head of the Trusted Sources consultancy, said: “This shows that Shell has begun to get the hang of things in Russia. For many years they were behind BP, which understood the importance of becoming involved in the domestic business community and being perceived as one of the family. For several years Shell has tried to insulate itself. It was a policy that backfired very badly.”

As well as Sakhalin-2, Shell is developing the vast Salym onshore oil project and has spoken often of its desire for a third big development in Russia. Two months ago Rosneft hinted that it would strike an alliance with Total, the French energy group, despite years of disagreements over projects in the country.

Sergei Bogdanchikov, the chief executive of Rosneft, said at the time that “very soon you will hear that the level of our relations has improved”. Yesterday he hailed the deal with Shell as one that would “widen the scope and geography of our work”. Shell has refused to criticise the Kremlin despite the handling of the Sakhalin-2 licence, limiting complaints to a broad concern about any country changing the terms of an agreement during the course of a contract.

Western analysts widely viewed claims that Shell had broken licence conditions at Sakhalin-2 as a thinly veiled excuse to allow Gazprom to negotiate terms for its entry into the project. Industry experts said yesterday that the new alliance was a sign that Russia may be showing a more conciliatory face to lure investment. Gazprom said yesterday that it was in talks with foreign companies about a new model of cooperation to develop the Shtokman gasfield in the Barents Sea.

Malcolm Brinded, Shell’s head of exploration and production, indicated last week that any lingering tension pertaining to the Sakhalin-2 dispute had disappeared. He said that he understood Russia’s policy of seizing back control of its natural assets. “It’s natural for governments to strike the appropriate balance between what is in the national interest and what needs to be to stimulate international companies to bring in their development capabilities,” he said.

A source close to the talks between Rosneft and Shell said that the companies were considering joint projects in Russia and in another country. Another source added that the two may choose to work more closely together in Kazahkstan, where both companies have strong Caspian Sea positions.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article2051270.ece

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