Shell said to yield project to Russia

Royal Dutch Shell has offered to cede control of the $22-billion Sakhalin-2 project, Russia’s biggest single foreign investment, to state gas monopoly Gazprom after months of government pressure, industry sources said Monday.

Such a deal would appear to mark a victory for the Kremlin, determined to wrest control over the “commanding heights” of the Russian economy, and a retreat by Shell.

Agreement in principle was reached at talks last week for Shell to reduce its 55% holding to a blocking stake of at least one-quarter in the world’s largest liquefied natural gas project, the sources said.

Both companies confirmed Shell Chief Executive Jeroen van der Veer had met Gazprom head Alexei Miller in Moscow on Friday, but declined to go into detail on their talks.

“I can confirm that Shell Chief Executive Jeroen van der Veer met Gazprom head Alexei Miller and Energy Minister Viktor Khristenko in Moscow on Friday to discuss Sakhalin-2-related issues,” a Shell spokesman said Monday.

“The discussions were positive but their contents remain confidential.”

The tentative understanding comes after months of pressure from Russia’s Natural Resources Ministry and its environmental regulator, which have accused Shell of ecological violations.

The world’s biggest gas producer, Gazprom has long coveted a share of the vast oil and gas project on the Pacific island of Sakhalin that will supply Asia’s growing energy markets.

Gazprom won powerful backing from the Kremlin, angered at cost overruns that meant Russia must wait longer to see a profit. Analysts sensed the Kremlin at work when environment officials began pursuing Shell for alleged violations including unauthorized tree felling and misuse of water permits.

Gazprom’s chief spokesman, Sergei Kupriyanov, said, “Shell did indeed make several proposals concerning Sakhalin-2 at a meeting Friday.

“Gazprom has yet to decide on Shell’s proposals because the project’s problems, including ecological problems, remain in place,” Kupriyanov said.

With Shell willing to surrender Sakhalin-2 to a Kremlin determined to wrest more control over Russia’s energy riches, the local partners in Anglo-Russian venture TNK-BP may now come under the spotlight.

Industry insiders say a deal for Gazprom or state-controlled Rosneft -- both led by high state officials -- to buy into TNK-BP is probable before the December 2007 general election.

“If you look at sectors that the government regards as strategic -- oil, gas, metals, maybe the media -- make sure you sign up with someone who has a long-term relationship with the government,” said Stephen O’Sullivan at Deutsche UFG in Moscow.

Analysts suspect the official campaign against Shell was designed to secure better terms for Russia, which has no equity stake in Sakhalin-2 under a production-sharing agreement struck in the early 1990s when oil prices were much lower.

Work on Sakhalin-2, which will supply a liquefied natural gas processing facility, is mostly complete but threats of license withdrawals, fines and litigation are disrupting progress.