Anglo-Dutch Shell yields to Russia's Gazprom over Sakhalin

Dec 21, 2006, 19:10 GMT

The Hague - Anglo-Dutch energy company Shell announced a deal with Gazprom worth 5.45 billion dollars on Thursday that yields control of the Sakhalin II oil and gas project to the Russian state company following weeks of hard and secret bargaining.

Shell said it had signed an agreement with Japanese companies Mitsui and Mitsubishi and Gazprom 'to bring Gazprom into the Sakhalin Energy Investment Company Ltd as a leading shareholder.'

Under the agreement, Gazprom would hold 50 per cent of Sakhalin plus one share, giving it control, Shell said.

Shell, which held 55 per cent, is to retain a stake of 27.5 per cent, while Mitsui and Mitsubishi would also see their stakes halved to 12.5 and 10 per cent, respectively.

Gazprom would pay 5.45 billion dollars in cash.

Shell chief executive Jeroen van der Veer said: 'Our first priority is to get Sakhalin II up and running. This agreement is an important step forward, and positions Sakhalin II for further growth opportunities.'

Gazprom's Alexey Miller said: 'Gazprom is implementing the strategy of strengthening its positions on LNG markets. Entering Sakhalin II project that involves production and marketing of LNG is an important step towards this objective.'

Shell signed a production-sharing agreement with Russia in 1994, allowing the firm to develop an estimated 500 billion cubic metres of gas and 150 million tons of crude oil reserves around Sakhalin in the Far East.

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 doubled to 20 billion dollars, keeping Moscow from accessing oil and gas revenues.

That, along with environmental concerns, prompted the Russians to act to gain control of the mammoth project.