Gazprom board chair says Shell Sakhalin-2 deal 'close'

Dec 12, 2006, 17:51 GMT

Moscow - Russian gas monopoly Gazprom is close to a deal with Royal Dutch Shell to allow the state-owned natural gas giant to enter the Sakhalin-2 oil and gas venture, Gazprom board chairman Dmitry Medvedev said Tuesday.

'The deal's final format has not been reached, but both sides are close to a deal,' Medvedev told reporters at a Moscow news conference.

Sakhalin-2 has come under fire from Russian ecological officials, who on Tuesday said it had caused a preliminary 10 billion US dollars in environmental damage.

Medvedev's announcement and the damage bill came amid media reports Netherlands-based Shell had offered Gazprom, which has made clear its interest in entering the project, control over the 20- billion-dollar Sakhalin-2 venture.

The Gazprom board chairman - who is also Russia's first deputy prime minister - said while the exact size of Gazprom's share is 'not the most important issue,' it could be as much as the 50-percent controlling share.

Medvedev also said all possibilities for the deal were being considered, from monetary payment to a share exchange, noting that share-exchanges were the 'best way to create a partnership.'

Shell representatives told Deutsche Presse-Agentur dpa Tuesday that talks were ongoing and had been 'constructive and positive.'

Russia's largest energy project is currently 55-percent owned by Netherlands-based Shell, and 25 and 20-percent, respectively, by Japan's Mitsui and Mitsubishi. Shell 100-percent subsidiary Sakhalin Energy is the project's operator.

Oleg Mitvol, head of Russia's federal ecological watchdog, said Tuesday that his agency would sue the Sakhalin-2 project in March for 10 billion dollars it has allegedly caused in environmental damage.

Mitvol has claimed Sakhalin-2 has harmed the sea bed off Russia's Pacific Sakhalin Island, as well as endangered the area's grey whale populations and the island's flora.

Shell representatives told dpa Tuesday that Sakhalin Energy had not yet received any findings from the Russian Natural Resources Ministry's environmental audit, noting that 'the project's environmental impacts are essentially short-term and reversible.'

Many observers have called the environmental citations, which have hounded the project throughout the fall, a means to improve Gazprom's bargaining position.

Gazprom, the world's third-largest energy firm, has made aggressive inroads in recent months into all areas of power creation, with officials saying it could become the biggest company on earth.

Rinat Gizatulin, spokesman for the Natural Resources Ministry, told Interfax Tuesday that a controlling Gazprom share would not change the situation.

'When a new shareholder appears, we will hold consultations with it and insist the operator fix the violations,' Gizatulin said.

It is not clear if Shell-owned Sakhalin Energy would remain the project's operator if Gazprom were to buy a controlling stake.

Shell signed a so-called production-sharing agreement (PSA) with Russia in 1994, allowing the firm to develop an estimated 500 billion cubic metres of gas and 150 million tons of oil reserves around Sakhalin. Under the terms of the PSA, Russia would begin to collect a share from sales only after Shell recouped its construction costs.

Those construction costs have since ballooned to 20 billion dollars, from earlier estimates of 10 billion dollars - keeping Moscow from accessing oil and gas revenues.

Mitvol, the environmental official, said the agency would sue the project in the Stockholm Arbitration Court under New York law - as per the PSA - and in Russian courts for violations that fall outside the PSA.

He also said cases were possible in English, Belgian, US, Japanese and Italian courts.

The 10 billion dollars in damage, Mitvol said, was a preliminary estimate expected to be finalized in the summer. Scientists from NGOs and the government-connected Russian Academy of Sciences will help formulate damage estimates, he added.

A separate criminal case on the environmental damage could be taken up by the Russian Prosecutor General's office, Mitvol said.