Shell and partners cede control of Sakhalin II to Gazprom

12 December 2006

After months of strained negotiations, it appears that Shell and its partners have given Gazprom, the Russian-state owned gas monopoly, 50 percent plus one control of the controversial oil and gas project.

Sakhalin II, the largest single oil and gas project in the world and located on Russia’s far-eastern island, has long been an interest for Gazprom and the Kremlin, particularly after investigation found serious environmental violations in October.

Threats of shutting down the project yielded negotiations which have resulted in Shell reducing its stakes from 55 percent to 25 percent. Japanese minority shareholders Mitsui and Mitsubishi, initially holding 25 and 20 percent respectively reduced their stakes by 10 percent each. Gazprom needs an additional percent to make its majority hold official.

In initial negotiations, Gazprom would have had a 25 percent stake in Sakhalin in exchange for giving Shell a 50 percent hold on Zapolyarnoye, a smaller field in western Siberia. However, negotiations came to a quick end when Shell more than doubled the Sakhalin’s estimated costs from $10 billion to $22 billion, and Gazprom walked out. Now, with Gazprom gaining control of Sakhalin, the upside for Shell may be not only a stake in Zapolyarnoye, but also a cash payment.

The effect of this change in stakeholders worries many, as the Russian environmenal agency Rosprirodnadzor’s crackdown on Sakhalin’s ecological abuses may end once Gazprom takes control. Oleg Mitvol, the deputy head of the agency, claims there will no be favorites when it comes to environmental violations. That remains to be seen.

Additional REsources

• Shell Makes Sakhalin Offer, The Moscow Times, December 12, 2006
• The Mysterious Influence of Inspector Mitvol, The Moscow Times, December 12, 2006 
• Shell offers control of Sakhalin-2 to Gazprom, Reuters, December 11, 2006
• Gazprom’s gas grab, The Financial Times, December 11, 2006