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Gazprom Reaches Deal with Shell on Sakhalin

The complete article from the FT:

Gazprom strikes $7.45bn Sakhalin-2 deal Arkady Ostrovsky in Msocow Gazprom, Russia’s state backed gas giant, on Thursday agreed to pay $7.45bn for majority control in Sakhalin 2, the $20bn oil and gas project led by Royal Dutch Shell, cementing the Kremlin’s grip on the country’s energy resources and ending months of sustained pressure on foreign investors. Shell, which owned 55 per cent stake of the project, and its two Japanese partners – Mitsui and Mitsubishi – agreed to halve their stakes to give Gazprom control and unblock the project, which was almost stalled by Russian authorities. The price paid by Gazprom for its control – 50 per cent plus one share – was much higher than many analysts expected. “It is a fair price and it should reduce the shouting about expropriation [of assets],” said Al Breach, chief strategist at UBS Russia. Shell will remain the operator of the project, which involves bringing oil and gas from offshore and transporting it through twin pipelines across the length of the Sakhalin island to an oil terminal and a liquefied natural gas plant, the first in Russia. The highly political deal was negotiated with the help of three governments – UK, the Netherlands and Japan – and sealed by Vladimir Putin, Russia’s president. It follows months of public threats by Russian officials to withdraw licenses from Shell on environmental grounds. In return for gaining control in Sakhalin, Russia approved an increased budget for the project and effectively dropped a series of environmental complaints against it, suggesting these had been little more than an negotiating tactic. Mr Putin said: “I am very pleased that our environmental agencies and our investors have agreed about the resolution of the questions which have arisen.” He also thanked foreign companies for their “flexibility in the course of negotiations”. Russia also agreed to double the cost of the project to $20bn, something it had opposed for months. “The project is becoming more expensive and there are objective reasons for this,” said Victor Khristenko, Russia’s Minister for Industry and Energy, who had argued just a few weeks ago that cost over-runs were unjustified. Jeroen van der Veer, Shell’s chief executive of Shell, said in a statement that the company’s priority was “to get Sakhalin-2 up and running”, describing the agreement as “an important step foward.” . The deal eliminates one of the biggest anomalies in Russia’s energy sector and irritants to the Kremlin – a large project developed without Russian participation and in defiance of Gazprom’s export monopoly. The deal was negotiated in the mid-1990s, when the oil price was low and Russia’s bargaining hand weaker, on terms which were seen as advantageous to foreign companies. Clawing back control over Sakhalin 2 is seen by the Kremlin as “restoring justice”, one senior Russian official said. “The only problem is that in Russia the law and justice are not the same thing,” he added.