The Motley Fool: Playing the Russian Shell Game: “It's better for a foreign investor to stay on the good side of the Russian government. Even if you're within your rights in turning down a "deal," being greedy about hanging on to too good of a thing can get you YUKOSed if you're not careful.”: Posted Saturday 9 July 2005
By Rich Smith
Investors weren't quite sure what to make of yesterday's news involving Russia's Gazprom and partner Royal Dutch (NYSE: RD)/Shell (NYSE: SC). As reported on CNNMoney, Royal Dutch/Shell has cashed in nearly half of its interest in the Sakhalin-2 liquefied natural gas project (located near the island of the same name) in exchange for a 50% stake in the lower stretch of a Siberian gas field known as Zapolyarnoye.
On hearing the news, investors sold off the shares of both Royal Dutch and Shell by about 1% apiece. In contrast, Gazprom's shares, which trade over the counter, were bid up more than 4%. The negative, though muted, reaction to the news on the part of investors in the foreign oil companies is understandable. After all, Sakhalin-2 has progressed nicely since beginning production in 1999. It's a proven find, the world's largest liquefied natural gas (LNG) project, and likely to turn into an all-around winner for its participants (which in addition to the companies named include nearby Japan's Mitsubishi and Mitsui (Nasdaq: MITSY)). In contrast, it's not yet known how well the "Lower Zapo" field project will pan out.
There are a few factors, however, that suggest the deal is actually good for Royal Dutch/Shell. First and foremost, of course, is the political reality: It's better for a foreign investor to stay on the good side of the Russian government. Even if you're within your rights in turning down a "deal," being greedy about hanging on to too good of a thing can get you YUKOSed if you're not careful.
Second, even if the two projects are not exactly comparable, Gazprom will be paying Royal Dutch/Shell the difference in value between the sold stake in Sakhalin-2 and Royal Dutch's new interest in Lower Zapo.
Third, it's worth remembering that, while Sakhalin-2 is believed to hold 4 billion barrels of oil equivalent, Royal Dutch/Shell had claim to just a 55% interest in that -- 2.2 billion barrels. After selling a 25% interest in Sakhalin-2 to Gazprom, Royal Dutch/Shell will still have an interest in about 1.2 billion barrels there; by gaining a 50% in interest in Lower Zapo, believed to contain 3 billion barrels, it gets access to 1.5 billion more. Net result: a gain of about 500 million barrels to Royal Dutch/Shell's recently drained reserves.
Final point: Note the percentages. Once the deal is final, Royal Dutch/Shell will continue to hold a nearly 30% interest in Sakhalin-2 and acquire a 50% interest in Lower Zapo. Each of those stakes is a "blocking stake," enabling Royal Dutch/Shell to prevent most of the nastier tricks that can be played on a foreign investor under Russian corporate law (share dilution, restructurings, asset stripping, and the like). Given the harsh (business) environment prevailing in Siberia, Royal Dutch/Shell can use all the protection it can get.
Fool contributor Rich Smith owns no shares in any of the companies mentioned above.
http://www.fool.com/News/mft/2005/mft05070811.htm
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