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Gazprom, Shell Sakhalin Gas Venture Reports Unexpected Profit

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July 16 (Bloomberg) — OAO Gazprom and Royal Dutch Shell Plc’s Sakhalin-2 venture in Russia posted an unexpected profit last year after oil and liquefied natural gas shipments beat targets to offset losses from a delay in the project.

The partners had estimated a loss because a delay in the start of LNG output forced them to compensate customers for contracted volumes, two people familiar with the results said, declining to be identified in line with company policy. The Yuzhno-Sakhalinsk, Sakhalin Island-based venture doesn’t report financial results. Sakhalin is off Russia’s far eastern coast.

Sakhalin Energy loaded the first commercial LNG cargo in March 2009, a delay from a planned start in the second half of 2008. A total of 81 cargoes of LNG and 59 cargoes of oil were loaded, beating targets for the year by more than 47 percent and 11 percent, respectively.

The LNG plant has allowed Russia, the holder of the world’s biggest gas reserves, to break into Asia Pacific markets and 65 percent of the volume contracted for Japan. LNG is gas cooled to a liquid for transportation by ship.

Capex, Expenses

Sales reached $3.6 billion last year and the venture cut operating expenses to $1.56 billion and capital expenditure to $846 million from a planned $2 billion and $1.14 billion, respectively, according to the presentation.

Gazprom, the majority shareholder, declined to comment on the presentation as did Ivan Chernyakhovsky, a spokesman at Sakhalin Energy. Vera Surzhenko, a Shell spokeswoman in Russia, confirmed the venture posted a profit before interest and after taxes last year. She declined to provide figures or comment on the presentation.

The venture reached operational profitability last year, Shell Chief Executive Officer Peter Voser said in an interview with newspaper Vedomosti published yesterday.

The Sakhalin-2 partners had $21.3 billion in capital expenditure from 2001 through 2009, while total costs exceeded $24 billion, according to the presentation.

In 2005, Shell, then majority owner, said the second phase of the project, which involved year-round crude output and production of LNG, would cost $20 billion, double an original estimate. The announcement stirred controversy with the Russian government, which will share royalties only after the investment is recouped. The dispute on costs and environmental damage led the Hague-based company to agree to cede control of the project to state-run Gazprom in 2006.

Russia in 2007 approved a second stage of investment for Sakhalin-2, allowing the spending of $19.4 billion until 2014. That level refers to costs which under production sharing agreement can be recovered.

Gazprom controls Sakhalin Energy and Shell owns 27.5 percent. Mitsui & Co. holds 12.5 percent and Mitsubishi Corp. 10 percent.

–Editor: Jonas Bergman, Stephen Cunningham

To contact the reporter on this story: Anna Shiryaevskaya in Moscow at [email protected]

To contact the editor responsible for this story: Will Kennedy at [email protected]

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