Gazprom acquires controlling stake in Sakhalin-2

Gazprom has acquired a 50%-plus-one share in Sakhalin Energy Investment Co. for $7.45 billion in cash under a sale and purchase agreement signed with SEIC shareholders.

Apr 24th, 2007

Uchenna Izundu
International Editor

LONDON, Apr. 24 -- OAO Gazprom has acquired a 50%-plus-one share in Sakhalin Energy Investment Co. (SEIC) for $7.45 billion in cash under a sale and purchase agreement signed with SEIC shareholders. The deal provides Gazprom with entry into the 9.6 million tonne/year Sakhalin-2 LNG project slated to start exports in 2008 to Asian-Pacific markets.

The other three shareholders, Royal Dutch Shell PLC, Mitsui & Co. Ltd., and Mitsubishi Corp., each will dilute their stakes by slightly more than 50%, to receive a proportionate share of the purchase price. Shell will now have about 27.5%, Mitsui 12.5%, and Mitsubishi 10% in SEIC.

The SPA concludes the protocol for Gazprom's participation begun last December after an aggressive Russian government campaign claiming that SEIC, formerly led by Shell, had violated environmental standards on Sakhalin Island.

Shell said that Gazprom's inclusion increased the chances of expanding LNG capacity trains at Sakhali-2. SEIC has sold out the capacity of both trains to Japan, South Korea, and the US West Coast.

Costs for the project have doubled from $10 billion because of increased energy costs, construction, and environmental challenges. The Russian government has approved a $19.4 billion budget until 2014.

The Russian Federation's Ministry of Natural Resources also has approved SEIC's revised environmental action plan, which will "enhance contractor management for environmental impact during the onshore pipeline construction," SEIC said. "The revised plan sets out detailed action points, action parties, and close-out dates."

Sakhalin Energy Chief Executive Ian Craig will remain in his position until yearend, when he will be replaced by a Gazprom representative. He said the deal has ended a "period of uncertainty."

Contact Uchenna Izundu at uchennai@pennwell.com

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