Gazprom gains majority stake in Russian project from Shell

From the Associated Press

Russia's state-controlled natural gas monopoly wrested control of the country's largest foreign investment from Shell on Thursday, taking a majority stake in the Sakhalin-2 project for $7.45 billion in a deal that consolidates the Kremlin's command over national energy resources.

The agreement, announced at a Kremlin meeting between President Vladimir V. Putin, executives from OAO Gazprom and Royal Dutch Shell as well as top executives from Japanese shareholders, comes after months of mounting pressure from Russian regulators.

Under the deal, Gazprom will pay cash for a 50% stake plus one share in the $22-billion development on the Pacific island of Sakhalin, and Shell, Mitsui & Co. and Mitsubishi Corp. will halve their stakes in the project.

That puts Gazprom in the driver's seat of Russia's first liquefied natural gas development, which is poised to be a key supplier to growing markets in Asia and North America.

"It sounds like Gazprom has got a fantastic economic deal out of it, but perhaps it's the only feasible political deal for Shell," said Roland Nash, head of research at investment bank Renaissance Capital. "They really were negotiating from a position of weakness -- they were always going to lose one way or another."

At the Kremlin, Putin said environmental concerns about the project had been essentially resolved. Officials had accused Shell of damaging the fragile environment on the island and had threatened to revoke key licenses.

Although analysts said the probes were aimed at ensuring Gazprom's entry, Putin sought to distance the government from the deal.

"The fact that Gazprom has taken a decision to participate in the work of Sakhalin-2 is a corporate decision," Putin said. "The government of the Russian Federation has been informed about this and we have no objections."

Shell said in a statement that it would retain a 27.5% stake and "continue to significantly contribute to the [consortium's] management and remain as technical advisor."

Shell Chief Executive Jeroen van der Veer said the company's first priority was to get Sakhalin-2 up and running.

"Now we have achieved stability, when all partners can work on the project," Van der Veer was quoted as saying by the Itar-Tass news agency. "In this situation all parties win -- Russia, Japan and investors."

Shell infuriated the government last year when it announced that the cost of the project would double to $22 billion -- significantly delaying the point at which Russia sees a profit from the fields because the terms of Shell's original agreement allow the company to recover costs first.

Separately, Gazprom said Thursday that its first-half net income more than doubled from the same period a year earlier to $12.23 billion, thanks to rising gas prices and the consolidation of its oil unit, Gazprom Neft.

The company said revenue for the first six months of the year reached $41.5 billion, compared with $23.3 billion in the first half of 2005. The company did not break out quarterly results.

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