MarketWatch: Gazprom: Sakhalin cost overrun hits shell asset swap plan: “Russian state gas monopoly OAO Gazprom said Friday it will revise downward its valuation of a 25% stake it intends to acquire in the Royal Dutch/Shell-led Sakhalin-2 project, in light of cost overruns announced Thursday.”: Posted 16 July 2005

MOSCOW (MarketWatch) -- Russian state gas monopoly OAO Gazprom (GSPBEX.RS) said Friday it will revise downward its valuation of a 25% stake it intends to acquire in the Royal Dutch/Shell-led (RD, SC) Sakhalin-2 project, in light of cost overruns announced Thursday.

Under the swap deal signed earlier this month, Gazprom will buy a stake of as much as 25% plus one share in the Sakhalin-2 project, an oil and gas venture located off Russia's Pacific coast. In return, it agreed to cede to Shell a 50% stake in a massive Siberian gas field. The difference in value between the two assets is to be settled for a sum of cash to be determined in the future.

Shell said Thursday that costs in the second phase of the Sakhalin-2 project may double to $20 billion, and first liquefied natural gas deliveries may be delayed by six months to mid-2006.

"The amount of capital investment in the Sakhalin-2 project and the timeframe for the first LNG deliveries are key factors that determine the value of assets in this project," Gazprom Deputy Chief Executive Alexander Medvedev said in a press release. These two factors "will undoubtedly lead to a downward revision in the value of Shell's Sakhalin-2 assets."

The Sakhalin-2 project has already signed contracts to supply gas to Asia and North America. Mitsui & Co. Ltd. (MITSY) and Mitsubishi Corp. (8058.TO) also have stakes in the project.

Rising metals prices and the devaluation of the U.S. dollar over the past two years have raised costs for oil and gas projects around the world. When Sakhalin-2's board declared the second phase of the project commercial in May 2003, costs were estimated to total $10 billion.

Company Web site: http://www.gazprom.ru

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