End of the line: Shell said Russian gas giant Gazprom had taken control of the Sakhalin 2 project
Gazprom takes Sakhalin 2 keys
Russian gas monopoly Gazprom has completed a deal to take 50% plus one share in the Sakhalin 2 oil and gas project formerly led by Anglo-Dutch supermajor Shell , the companies said today.
Gazprom agreed last December to buy control in the project for $7.45 billion, seen by analysts as a knock-down price, and the companies said they hoped to complete the details in the first quarter of this year, Reuters reported.
After the final talks got bogged down in red tape and government protocol, they finally signed the deal today.
"We will start nominating executives tomorrow," Gazprom's deputy chief executive Alexander Medvedev said at a news conference after the deal was signed.
He said the new appointees, including a chief executive who would be appointed before the project's launch next year, would not necessarily come from Gazprom.
Sakhalin 2 is one of only three production sharing agreements (PSAs) in Russia's energy sector. The PSA deal allows the project to recoup capital costs from the project's revenues before sending any royalties to the state.
Under Shell-led management, the projected costs doubled to $22 billion, infuriating Russia's government and forcing Shell into months of negotiations, during which the state-controlled gas monopoly persuaded it to let it have a controlling stake.
Russia's Energy Ministry said today that the supervisory board of the PSA had approved $19.4 billion of reimbursable costs for the second phase up to 2014. The cost of the first phase was $2 billion, meaning the project will recoup a total of $21.4 billion of costs.
Shell and its Japanese partners Mitsui and Mitsubishi each gave up half of their stakes in the project to bring Gazprom on board, leaving them with 27.5%,
The deal followed months of pressure on the project by Russian environmental authorities and was interpreted by analysts as yet another step in the Kremlin's drive to win more control over Russia's huge energy industry.
The head of Shell in Russia, Chris Finlayson, said the negotiations with the government had left the PSA intact and no material changes in profitability for Shell. He also said there would be no slippage in the project schedule.
"No, absolutely not," he said, adding that Gazprom's entry into the project would improve the chances of keeping to the existing schedule, which foresees the first delivery of liquefied natural gas in summer 2008.
Sakhalin 2 is the world's biggest LNG project, with two production trains each capable of producing 4.8 million tonnes of the liquefied fuel a year.
Almost all the projected output has already been sold to buyers in Japan and South Korea, which rely on fuel imports for electricity production.
Finlayson said he had previously said it might be possible to add a third or even a fourth train, and said it still might be possible to double the project's capacity.
"The entry of Gazprom raises the chance of realising the third train," he said.