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Moscow Times: Gazprom Rethinks Value of Sakhalin-2


Moscow Times: Gazprom Rethinks Value of Sakhalin-2

Tuesday 19 July 2005

Gas giant Gazprom said on Friday it considered Royal Dutch/Shell’s assets on Sakhalin to be worth less after the oil major doubled the project’s cost estimates last week to $20 billion.

Earlier this month, Gazprom agreed to swap a 50 percent stake in its Siberian Zapolyarnoye gas field for a 25 percent stake in the Shell-led Sakhalin-2 liquefied natural gas project in the Far East.

On Thursday, Shell raised the cost estimate for Sakhalin-2 and postponed the first LNG shipment from the end of 2007 to summer 2008.

“The need to increase capital spending and the delay in the first LNG shipment from the Sakhalin-2 project will certainly lead to a downward revision of Shell’s assets value [in the swap deal],” the head of Gazprom’s export arm Gazexport, Alexander Medvedev, said in a statement.

Analysts have said the swap deal between Gazprom and Shell is unequal as Sakhalin is at a much more advanced stage than Zapolyarnoye.

“Most observers had assumed that Gazprom would be paying Shell, not the other way around,” UFG brokerage wrote in a note on Friday, adding that Shell’s higher cost estimates were now making this assumption less evident.

The Sakhalin group, which also includes Japan’s Mitsui and Mitsubishi, is building the world’s largest LNG plant and has already sold 80 percent of its projected output of 9.6 million tons per year under long-term deals with Korean, Japanese and U.S. firms.

On Thursday, Shell blamed rising metals prices, a weak U.S. dollar and Russian inflation for the cost jump.

Shell chief executive Jeroen van der Veer said he learned of the Sakhalin setback only on Wednesday and informed Gazprom on Thursday.

Gazprom has been long trying to make its way into Sakhalin-2 as it would give the firm its long-awaited entry into the booming LNG business.

Royal Dutch/Shell shares fell in London in their worst week since the January 2004 due to soaring costs and project delays at Sakhalin.

Shell shares in London fell 8 pence to 541 pence ($9.48), completing a 4.1 percent decline for the week. The Dutch parent, Royal Dutch Petroleum, fell 50 euro cents to 53.45 euros ($64.38) and were down 3.4 percent last week, the worst weekly drop in four months.

Van der Veer told the Financial Times that the “staggering” cost overruns at its Sakhalin-2 project have dealt a blow to the company’s reputation after last year’s admission it had overstated oil and gas reserves.

“I fully realize it has had an impact on our reputation,” van der Veer said in an interview published Saturday. “I’m concerned it will carry over to other things that we do.”

Shell-led Sakhalin Energy said Friday that it had signed a contract to supply liquefied natural gas to Korea Gas Corp. Korea Gas will buy as much as 1.5 million tons of LNG per year for 20 years, Sakhalin Energy said in a statement. It did not specify when the deliveries would start.

(Reuters, Bloomberg – combined reports)

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