Gazprom buying into Sakhalin Energy

By OGJ editors
HOUSTON, Dec. 21 -- OAO Gazprom signed a protocol with Royal Dutch Shell PLC, Mitsui &Co. Ltd., and Mitsubishi Corp. to bring Gazprom into the Sakhalin Energy Investment Co. Ltd. (SEIC) as the leading shareholder.

Gazprom will acquire a 50% stake plus one share in SEIC for $7.45 billion. The announcement was expected (OGJ Online, Dec. 12, 2006).

Existing SEIC partners each will dilute their stakes by 50% interest. Shell will retain a 27.5% stake, Mitsui 12.5% interest, and Mitsubishi 10% interest. SEIC will remain operator of the Sakhalin-2 project.

Gazprom will be the majority SEIC shareholder, and Shell will continue its role as technical advisor.

The consortium's focus is completion of Sakhalin-2 on schedule, allowing LNG to be delivered to Japan, Korea, and the North American West Coast. All existing LNG sales contracts will remain effective.

Alexey Miller, Gazprom chairman, said, "Gazprom is implementing the strategy of strengthening its positions on LNG markets. Entering Sakhalin-2 project that involves production and marketing of LNG is an important step towards this objective."

Gazprom and existing SEIC shareholders plan an Area of Mutual Interest arrangement covering future Sakhalin oil and gas exploration and production opportunities as well as the building of Sakhalin II into a regional oil and LNG hub.

Liabilities
Separately, Shell, Mitsui, and Mitsubishi reached agreement with the Russian Ministry of Industry and Energy as the authorized state body for the supervision of production sharing agreements regarding Sakhalin-2.

The project had been under pressure from the Russian government, which withdrew key environmental permits from Shell and its Japanese partners. As a result of the withdrawn permits, construction on the project had effectively come to a halt (OGJ Online, Dec. 7, 2006).

Daniel Barcelo, an analyst with Banc of America Securities, said terms call for Gazprom to be considered a partner from the start of the project, which means it could be retroactively held responsible for environmental liabilities.

"In our opinion, the environmental regulator, RosPrirodNadzor, is unlikely to find against Sakhalin Energy in its ongoing audit nor delay the project further," Barcelo said.

He noted that the Sakhalin agreement demonstrates the Russian government is in a position "to extract concessions from the international oil companies utilizing environmental and budgetary approval as levers."

Environmental groups withheld judgment on the transaction, said spokesmen for Sakhalin Environment Watch and Pacific Environment.

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