Financial Times: Shell and Gazprom agree swap: “Royal Dutch/Shell, the oil company, and Gazprom, Russia's state-controlled gas monopoly, have agreed an asset swap that will see them become partners in two big Russian gas projects.":”Shell is thought to be the largest foreign investor in Russia": Thursday 7 July 2005

By Thomas Catan in London and Arkady Ostrovsky in Moscow

* Asset deal will see energy groups become partners in Russian gas projects

* Anglo-Dutch company moves to replenish reserves

Royal Dutch/Shell, the oil company, and Gazprom, Russia's state-controlled gas monopoly, have agreed an asset swap that will see them become partners in two big Russian gas projects.

Under a provisional deal signed yesterday, Gazprom will acquire a 25 per cent stake in the huge Sakhalin-2 liquefied natural gas project off the east coast of Russia, of which Shell owns 55 per cent. In return, Shell will get a 50 per cent stake in Gazprom's Zapolyarnoye Neocomian gas field in western Siberia, which Shell said contained up to 3bn barrels of oil equivalent.

The assets that Shell is giving up are seen as more valuable. The companies said the difference would be settled with a package of cash and other assets. The deal is seen as boosting Shell's position in Russia, which is vital if it is to replenish its dwindling reserves of oil and gas. The companies expect to complete the agreement next year.

Shell, which has made no secret of its desire to have Gazprom as a partner in Russia, said yesterday's deal represented "an important stepping-stone to further close alliances with Gazprom", which could include more asset swaps.

Some observers believe Shell is also seeking political cover following the break-up and de facto nationalisation of Yukos by the Russian government last year.

Jeroen van der Veer, Shell chief executive, said: "Today strengthens the good relationship between Shell and Gazprom and is a basis for further co-operation on integrated gas projects, both in Russia and internationally."

Gazprom and Shell have had a strategic alliance since 1997 but until now had not joined forces on a major project. Some analysts thought the deal could help Shell secure an expansion of the Sakhalin-2 project and improve its chances in a battle with several rivals for a slice of Gazprom's huge Shtokman gasfield in the Barents Sea.

Gazprom, meanwhile, has been seeking a foothold in the fast-growing global market for LNG. Russia has the world's largest natural gas reserves and LNG is a vital way of getting get it to distant markets. Gazprom said the deal was part of its strategy to diversify both its products and geographically. It said the Sakhalin-2 project would open up Korea, Japan and the US west coast to Gazprom LNG exports. "We want to start building up our LNG profile now."

Shell is thought to be the largest foreign investor in Russia, ahead of BP, which owns a 50 per cent stake in a joint venture with Russian oil group TNKP. BP and Shell - the second and third-largest oil companies respectively - have been trying to get close to Gazprom, which is playing an increasingly important role.

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