Shell boss talks of 'difficulties' in Sakhalin 2 deal with Gazprom

Jan 7, 2007, 19:28 GMT

Amsterdam - Anglo-Dutch energy multinational Shell had experienced 'a great deal of difficulty' with the way Russia's Gazprom had negotiated over the Sakhalin 2 oil and gas concession in the Far East, Shell chairman Jeroen van der Veer said Sunday.

'Regarding the pressure on the environmental side, we had large difficulties. We made clear to the Russians that we did not agree,' Van der Veer told Dutch national public broadcaster NOS.

The talks were 'among the most difficult I have participated in,' Van der Veer said.

At the end of 2006, Shell and its Japanese partners, Mitsui and Mitsubishi, yielded majority control over the huge resources to Gazprom in a deal worth 7.45 billion dollars, after pressure from the Russian environmental authorities.

Van der Veer made clear that Shell had disagreed strongly with the way in which the talks, conducted in secret over a period of weeks, had taken place.

'The Russian agenda has been apparent for a number of years. The authorities want greater influence over natural resources. What we did not see coming was the enormous pressure exerted on the environmental side,' Van der Veer said.

'In fact it was a classic example that you can never carry out a large-scale project without having the government behind you.'

The Shell boss noted that there were advantages to the deal announced on December 21, in particular that 'you can carry on with the blessing of the Russians.'

'And you have the prospect of new opportunities for cooperation in Russia,' he said.

In terms of the deal, Gazprom is to hold 50 per cent of Sakhalin 2 plus one share, giving it control, while Shell, Mitsui and Mitsubishi have their stakes halved to 27.5, 12.5 and 10 per cent respectively.

Gazprom is to pay 7.45 billion dollars in cash to the three companies.

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

Under the terms of the agreement, Russia would begin to collect a share from sales only after Shell had recouped its construction costs.

Those construction costs have since doubled to 20 billion dollars. That, along with environmental concerns, prompted the Russians to act to gain control of the mammoth project.