Russia secures majority stake in energy project

MOSCOW — Russia's state-controlled natural-gas monopoly wrested control of the country's largest single foreign investment from Shell on Thursday, taking a majority stake in the Sakhalin-2 project for $7.45 billion in a deal that consolidates the Kremlin's command over national energy resources.

By thrusting itself into the lead role on the huge Sakhalin-2 oil and gas project, Russia will halve Royal Dutch Shell and its Japanese partners' stakes in the field to make room for its state-owned energy giant Gazprom, Shell said Thursday.

The move concludes months of wrangling and heavy pressure from the Kremlin over control of the $22 billion project, which aims to build one of the world's biggest liquefied natural gas (LNG) export terminals on Sakhalin Island — conveniently close to an eager Japanese energy market.

It also fits Russia's recent push to reassert control over its strategic resources, giving it more leverage in the global oil market while enhancing its overall economic and political clout.

Russia is now the world's second-biggest oil exporter after Saudi Arabia.

The agreement, announced at a Kremlin meeting between President Vladimir Putin, executives from Gazprom and Royal Dutch Shell and top executives from Japanese shareholders, comes after months of mounting pressure from Russian regulators.

Under the deal, Gazprom will pay cash for a 50 percent-plus-one share in the $22 billion development on the Pacific island of Sakhalin, and Shell, Mitsui and Mitsubishi will halve their stakes in the project.

That puts Gazprom in the driver's seat of Russia's first liquefied natural gas development, which is poised to be a key supplier to growing markets in Asia and North America.

"It sounds like Gazprom has got a fantastic economic deal out of it, but perhaps it's the only feasible political deal for Shell," said Roland Nash, head of research with the Renaissance Capital investment bank. "They really were negotiating from a position of weakness — they were always going to lose one way or another."

At the Kremlin, Putin said environmental concerns about the project had been essentially resolved. Officials had accused Shell of damaging the fragile environment on the island and had threatened to revoke key licenses.

Most observers haven't taken Russia's environmental concerns seriously, and the government itself has said that it was concerned that cost overruns were diluting the value of its stake in the project.

Russia has taken an increasingly tough stand against energy companies inside and outside of the country, notably seizing the assets of local player Yukos; deciding to develop the giant Shtokman natural-gas field in the Barents Sea alone; and refusing to allow Exxon Mobil to expand the Sakhalin-1 project.

"Shell's Sakhalin-2 has been the only major Russian development without any direct Russian involvement, an issue that was never sustainable given the government's recent moves to claw back state control over much of the Russian oil industry," wrote Jonathan Wright, an analyst at Citigroup, in a recent note to clients.

Though analysts said the probes were aimed at ensuring Gazprom's entry, Putin sought to distance the government from the deal.

"The fact that Gazprom has taken a decision to participate in the work of Sakahlin-2 is a corporate decision," Putin said. "The government of the Russian Federation has been informed about this and we have no objections."

He also thanked the companies "for the flexibility shown in the course of these negotiations, and I want to emphasize again that we will do everything to make sure the project is implemented."

Shell said in a statement that it would retain a 27.5 percent stake and "continue to significantly contribute to the [consortium's] management and remain as technical adviser."

Shell CEO Jeroen van der Veer put a brave face on Gazprom's entry to the project, which has been under negotiation for months, and said the company's first priority was to get Sakhalin-2 up and running.

For Shell, the stake sale is a big blow to the company's efforts to build up its reserve base, which is still considered weak by industry standards. Investors have been concerned over Shell's reserves since 2004, when it was forced to reclassify 1.4 billion barrels of oil as unproven.

But the deal may reduce pressure coming out of the Kremlin for further concessions, and also makes it more likely that shipments of LNG will start in 2008.

The companies said that a key focus will be to complete the project on time, allowing gas to be delivered to existing customers in Japan, Korea and the North American West Coast.

Proposed Pacific Northwest ports include Bradwood, Ore., between Astoria and Portland, and Coos Bay, Ore., according to the U.S. Federal Energy Regulatory Commission (FERC). Canada has approved a port at Kitimat, B.C., about halfway between Seattle and Juneau, Alaska.

Shell infuriated the government last year when it announced that the cost of the project would double to $22 billion — delaying the point at which Russia sees profits since the terms of Shell's original agreement allow the company to recover costs first.