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Nov. 02, 2005
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Kommersant (Russia): Shell Doesn’t Reach $20 Bln: "Visiting the Netherlands, Russian President Vladimir Putin lambasted the efforts of Shell to drive the budget of the Sakhlin-2 project up to $20 billion from $12 billion.": Wednesday 2 November 2005

Vladimir Putin has defended Gazprom’s interests in Sakhalin-2

Power and Business
Visiting the Netherlands, Russian President Vladimir Putin lambasted the efforts of Shell to drive the budget of the Sakhlin-2 project up to $20 billion from $12 billion. Yesterday’s statement of the Russian energy ministry, which calls the revising of the project’s budget economically unfounded, also proves that Russia said “no” to Shell.
Vladimir Putin devoted a big part of his meeting with the Dutch business elite, according to a source in the Dutch delegation, to the discussion of the Sakhalin-2 project where Sakhalin Energy (largely owned by Royal Dutch Oil) operates under the production-sharing agreement. Shell International’s head Jeroen van der Veer, the main opponent of the Russian president, was disappointed, as his colleagues say, as Vladimir Putin proved to him that Sakhalin Energy’s shareholders should not expect an increase in the project’s budget (and, consequently, no investment that the state returns under the product-sharing agreement). Even if the budget exceeds the earlier approved level of $12 billion, it will not reach $20 billion.

Vladimir Putin thus save money from state coffers and explained it to Shell that delays in the negotiations with Gazprom on the exchange of a stake in Sakhalin for a share in the Zapolyarnoe-Neokom joint venture are unacceptable.

Gazprom and Shell came to an agreement to exchange their holdings in this JV and Sakhalin Energy this spring. The July rapport memorandum says that Gazprom gets 25 percent plus one stock in Sakhalin Energy, while Shell gets a 50-percent stake in Zapolyarnoe-Neokom. The parties mentioned that these assets are not equivalent, so one of the companies will have to pay in addition. Yet, the parties still disagree who is to do this.

Perhaps, Shell decided to safeguard itself against unexpected expenditures of the exchange agreement. It announced a week ago that after the memorandum with Gazprom was signed, the investment in the second stage of the development of Sakhalin-2 might rise to $20 billion from $12 billion. The experts accounts the statement for with the company’s reluctance to pay extra money for Zapolyarnoe. Russian officials must have also noticed the connection, that’s why an increase in the expenditures on Sakhalin-2 has not been agreed on yet, Russian agencies wanting additional grounds from the Dutch.

Yesterday, when Vladimir Putin talked to Dutch businessmen, the Russian Industry and Energy Ministry circulated information about the session of the advisory board of Sakhalin-2 held the previous week. Members of the board considered a further implementation of the project and demanded detailed information on the evaluation of the project’s economic efficiency and foundation fro the changes in the budget. “Issues concerning the changes in the budget, which operating company’s wants to introduce without grounds for that, are still uncertain for the Russian party,” the statement runs.

The deal with Gazprom cannot be struck till Russin agencies decide either to sustain or to turn down the new budget for Sakhalin-2. Alexander Medvedev, director general of Gazpromexport, said a week ago that Gazprom is determined to exchange the stocks with Shell by August 2006.

Meanwhile, rivals of Shell, the developers of the Sakhalin-2 project (the Exxon Neftegaz operating company) understood the current situation around the company right and agreed to bring down the 2006 budget by $40 million, or, according to the information of Kommersant, by $140 million. So, we may suppose that they will have no problems with their would-be projects in Russia. But the only trouble is that Exxon Mobile has not declared its major interest in extracting the Russian oil so far.
by  Oleg Petrovsky

Russian Article as of Nov. 02, 2005

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