Financial Times: Gazprom holding talks with Shell: “Other than providing cash, strategic support, or a commitment to future capital investment, Gazprom could offer Shell access to other projects in Russia…” (ShellNews.net)

By Andrew Jack in Moscow

Published: October 11 2004

Gazprom, the Russian state-backed gas monopoly, might take a significant equity stake in the Sakhalin 2 oil and gas project managed by Royal Dutch/ Shell by the end of the year.

John Barry, president of Shell Exploration and Production Services for Russia told the Financial Times there had been "intense discussions" in recent months with Gazprom and put the chances of a deal by the end of 2004 at 50:50.

The deal would bring to an end a period during which some of Russia's most significant energy projects were controlled by foreign groups.

Sakhalin 2 was just one of three Production Sharing Associations agreed during the 1990s that granted foreign energy companies long-term legal and fiscal stability in exchange for significant investment.

It was the only one to remain without a Russian partner after the state oil company Rosneft recently acquired a 20 per cent stake in Sakhalin 1, which is managed by ExxonMobil.

Mr Barry stressed that any deal would require approval from Shell's Sakhalin 2 commercial partners. Shell controls 55 per cent of the project, with the remainder split between Mitsui and Mitsubishi of Japan. He said participation would "clearly have to be on commercial terms".

"It will have to be a balanced deal. [Gazprom] will have to bring something to the table."

He would not be drawn on the size of any equity participation but indicated that the percentage that Rosneft had in Sakhalin 1 was "apparently working satisfactorily".

Gazprom said it was "continuing discussions" on Sakhalin 2.

Industry observers have argued that the planned merger of Gazprom with Rosneft, scheduled for the end of this year, could ease discussions in the selection of a Russian state partner for Sakhalin 2, because it would avoid the foreign energy companies having to choose between two competing groups.

Gazprom dominates the Russian gas market, and gas is at the core of the Sakhalin 2 project, while Rosneft is already present in a number of projects off Sakhalin island in Russia's far east.

Other than providing cash, strategic support, or a commitment to future capital investment, Gazprom could offer Shell access to other projects in Russia including the development of the Shtokman field in the far north and the Zapolarnoya field.

Any deal on Sakhalin 2 would come at a time of growing involvement of the Russian state in its strategic natural resource sector.