Shell eyes more Russian projects with Gazprom

Shell’s Chief Executive Officer Jeroen van der Veer speaks during the presentation of Shell’s fourth-quarter and 2008 results in the Hague January 29, 2009. REUTERS/Robin van Lonkhuijsen/United Photos

Wed Feb 18, 2009 2:25pm EST

By Tanya Mosolova

YUZHNO-SAKHALINSK, Russia (Reuters) – Shell (RDSa.L) will discuss further cooperation with Gazprom on energy projects in Russia’s Far East, its chief executive said, reflecting industry hopes that lower oil prices will prompt countries with resources to offer better deals.

Royal Dutch Shell CEO Jeroen van der Veer told Reuters in an interview the company would discuss more projects with Russian state-controlled Gazprom (GAZP.MM) after launching the $22 billion Sakhalin-2 liquefied natural gas project on Wednesday.

The project on the Pacific island of Sakhalin, Russia’s first LNG plant, became symbolic in recent years of the Kremlin’s drive to reassert control over its natural resources.

Shell ceded control of the project to Gazprom after the project’s budget doubled and the company came under state pressure to reduce its holding.

But van der Veer said the Russian Far East was within Shell and Gazprom’s “area of mutual interests (AMI).”

“Based on the success (of Sakhalin-2), the partners will discuss with each other how we can give hands and feet to this AMI,” the executive said.

The fall in oil prices, which are trading at less than a third of peaks near $150 a barrel last July, has resulted in a scaling back of resource nationalism in countries keen to balance protecting their resources with the need for investment.

BP Plc (BP.L) Chief Executive Tony Hayward said this month that Western oil majors could even merge with state-owned oil companies, or NOCs (national oil companies).

Gazprom Deputy Chief Executive Alexander Medvedev said the company was considering the interest of Shell and its Japanese partners in Sakhalin-2, Mitsui (8031.T) and Mitsubishi (8058.T), in potential LNG projects on Russia’s Arctic peninsula of Yamal.

“If you look at our history, we have many partnerships with NOCs, not only Gazprom,” van der Veer said.

“In the Netherlands, we have developed our gas with the Dutch state,” he said. “We have worked in Nigeria and the state is the majority owner. In our experience, work with state companies is very normal.”

REDUCED COSTS

Van der Veer also said oil majors would benefit from lower construction costs, although the effects would only be felt after the end of the year.

Analysts have said energy companies could eventually expect to make big savings on steel, which can account for more than a quarter of the budget of some projects.

“We expect that (construction) prices will go lower … but it usually takes 12 to 18 months,” van der Veer said. “If it started somewhere in October last year, then 12 to 18 months from there we expect lower prices.” Steel, like oil, has dropped sharply in price as the global financial crisis slashes demand for cars and household goods and construction projects slow down worldwide.

However, oil prices, at about $35 a barrel, are still too low and costs have not yet dropped enough for Shell to consider new investments in oil sands.

Low prices and high costs were the reasons Shell, one of the biggest players in oil sands, last year delayed an expansion of its projects in Canada, which contains the largest oil reserves outside the Middle East.

“Three weeks ago, we saw prices of oil sands which we produce now or produced last year at $38 per barrel,” he said.

“If you started today with new projects for oil sands, then $38 would not be enough,” he said. “That’s why we have postponed what we call our second expansion of oil sands: because we think that later, the construction prices will go down.”

(Writing by Robin Paxton and Tom Bergin, editing by Anthony Barker)

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