Russia claws back control of Sakhalin 2 project

Gazprom, Russia's state-backed gas giant, yesterday agreed to pay $7.45 billion (€5.64 billion) for majority control in Sakhalin 2, the $20 billion oil and gas project led by Royal Dutch Shell, cementing the Kremlin's grip on the country's energy resources and ending months of sustained pressure on foreign investors.

Shell, which owned 55 per cent of the project, and its two Japanese partners, Mitsui and Mitsubishi, agreed to halve their stakes - leaving them with 27.5 per cent, 12.5 per cent and 10 per cent, respectively - to give Gazprom control and unblock the project, which was almost stalled by Russian authorities.

The price paid by Gazprom for its control - 50 per cent plus one share - was much higher than many analysts expected. "It is a fair price and it should reduce the shouting about expropriation [ of assets]," said Al Breach, chief strategist at UBS Russia.

Shell will remain the operator of the project, which involves bringing oil and gas from offshore and transporting it through twin pipelines across Sakhalin island to an oil terminal and a liquefied natural gas plant, the first in Russia.

The highly political deal was negotiated with the help of three governments - Britain, the Netherlands and Japan - and sealed by Vladimir Putin, Russia's president. It follows months of public threats by Russian officials to withdraw licences from Shell on environmental grounds.

In return for gaining control in Sakhalin, Russia approved an increased budget for the project and effectively dropped a series of environmental complaints against it, suggesting these had been little more than a negotiating tactic.

Mr Putin said: "I am very pleased that our environmental agencies and our investors have agreed about the resolution of the questions which have arisen."

He also thanked foreign companies for their "flexibility in the course of negotiations".

"We as the main shareholder of the project will do everything to launch it as soon as possible," Gazprom chief executive Alexei Miller said after meeting Putin.

Russia also agreed to double the cost of the project to $20 billion, something it had opposed for months. "The project is becoming more expensive and there are objective reasons for this," said Victor Khristenko, Russia's industry and energy minister, who argued a few weeks ago that cost over-runs were unjustified.

Jeroen van der Veer, Shell chief executive, said the company's priority was "to get Sakhalin 2 up and running", describing the agreement as "an important step forward".

A spokeswoman in London said no timing had been agreed for finalising the deal.

But the deal, which follows months of pressure from Russian officials who threatened to delay the project, raises questions about Shell's reserves, since the British-Dutch oil major has one of the worst reserve replacement records among its peers.

The deal eliminates one of the biggest anomalies in Russia's energy sector and one of the the chief irritants to the Kremlin - a big project developed without Russian participation and in defiance of Gazprom's export monopoly. The deal was negotiated in the mid-1990s, when the oil price was low and Russia's bargaining hand weaker.

Clawing back control over Sakhalin 2 is seen by the Kremlin as "restoring justice", one senior Russian official said.

"The only problem is that, in Russia, the law and justice are not the same thing."