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Shell Welcomes Putin’s Sakhalin Offer

The Moscow Times

Monday, June 29, 2009

Alexei Nikolsky / Ria-Novosti

Putin meeting Shell CEO van der Veer, left, and incoming CEO Voser on Saturday at his Novo-Ogaryovo residence.

29 June 2009

By Nadia Popova / The Moscow Times

Prime Minister Vladimir Putin offered Royal Dutch Shell a role in the Sakhalin-3 and Sakhalin-4 natural gas projects on Saturday, just 2 1/2 years after Europe’s biggest oil producer was forced to cede control of Sakhalin-2 to Gazprom.

Shell welcomed the proposal, which analysts said illustrated Gazprom’s need for technologies and money to develop the difficult offshore fields rather than a government change of heart toward foreign investors.

“We consider it possible to continue a partnership with Shell on other fields, namely Sakhalin-3 and Sakhalin-4,” Putin told Shell chief executive Jeroen van der Veer during a meeting Saturday at his Novo-Ogaryovo residence in the Moscow region.

“Your company’s competence and experience will be in demand in the remote and deep sea offshore areas,” he said, according to a transcript posted on the Kremlin’s web site.

Van der Veer, whose company now controls 27.5 percent of Sakhalin-2, said Shell was ready to begin work on the proposed projects. “We are ready to begin work on Sakhalin-3 and Sakhalin-4 if there is such an opportunity,” van der Veer told Putin. “There are ideal conditions for that now from the economic viewpoint — prices in construction are quite low, and the expenses will be lower correspondingly.”

Gazprom took control of Sakhalin-2 from Shell in 2006 after federal regulators threatened to close the $22 billion project on environmental grounds. In 2007, Shell sold its controlling stake in the project to Gazprom for $7.5 billion.

Shell spokesman Maxim Shoob said Sunday that no official decision had been made on his company’s participation but Sakhalin-3 looked appealing.

“We want to have Gazprom as a partner in the Sakhalin-3 project, but it’s too early to talk about the form of this partnership,” Shoob said, declining to comment on Sakhalin-4.

“In complex, large oil and gas projects like those in Sakhalin, we are interested in the entire value chain, which may include the exploration, building all kinds of infrastructure like pipes and sea platforms and the extraction,” he said by telephone.

Gazprom spokesman Sergei Kupriyanov said Sunday that no talks have been held between Gazprom and Shell on Sakhalin-3 or Sakhalin-4.

Gazprom could develop the Sakhalin-3 fields of Kirinskoye, Ayashskoye and Eastern Odoptinskoye, which Gazprom just received licenses for last month, said Valery Nesterov, an oil analyst with Troika Dialog.

Sakhalin-4 is a project that British Petroleum and Rosneft gave up on in March when drilling came up empty. Rosneft backed out of its license for the field afterward.

Gazprom and Shell declined to specify Sunday which fields they might work on together. Shoob also said it was too early to discuss how much Shell might invest in Sakhalin-3 and Sakhalin-4.

Putin’s spokesman Dmitry Peskov said Shell had the know-how that Gazprom needed to tap the offshore fields and praised its track record in Russia.

“Shell has made a good showing in Russia,” Peskov said Sunday. “It knows the market well, it has worked with Russian companies. And it has the technologies we need to develop Sakhalin-3 and Sakhalin-4.”

Peskov said Shell could cooperate with Gazprom and other companies in the projects. He dismissed the idea that the government might be more open to foreign investment in the energy sector now than in 2006, when Shell was pushed out of Sakhalin-2.

“Russia has always been open to foreign investors,” Peskov said.

Shoob said, however, that Shell has recently seen more cooperation and openness from the Russian government. “We can see that the Russian government has been paying more attention to foreign investors in the oil and gas sector,” Shoob said. “The government seems to understand that Russia does need the best internationally available technologies to develop the innovative economy.

“Developing Sakhalin is like sending a person to the moon — it can’t help but be done through international cooperation,” Shoob added.

Ronald Smith, chief strategist with Alfa Bank, said not much has changed since the Sakhalin-2 fiasco. “The state’s goal is the same as in 2006, which is to have a Russian company in majority control in any major project but to have the substantial participation of international majors who have experience in technology, either in LNG or offshore,” he said.

Nesterov noted that more than a third of the world’s oil is extracted offshore, but only 1.5 percent of Russia’s oil is extracted that way.

Nesterov said Shell might either create a joint venture with Gazprom to work on Sakhalin-3 and Sakhalin-4 or use the model developed for the Shtokman gas field. To develop Shtokman, Gazprom, Total and StatoilHydro established Shtokman Development AG, a special purpose company in which Gazprom owns half and the other investors have about a quarter each.

Neither Putin nor van der Veer specified Saturday what kind of partnerships on Sakhalin-3 and Sakhalin-4 projects were discussed.

“I think it’s a natural progress now, having built Sakhalin-2,” Shell chief financial officer Peter Voser, who is going to take over from van der Veer this Wednesday, said when asked about the specifics, Reuters reported.

Van der Veer came to Moscow to introduce Voser as his successor — and told Putin that the two could communicate in German, which Putin learned as a KGB spy in Germany in the 1980s.

“Mr. Voser speaks German as well as you do, so you will be able to speak to him directly,” van der Veer said. “He is from the German-speaking part of Switzerland. You have many times heard my bad German. It will not be repeated with Peter Voser.”

Putin said he wasn’t quite sure he would understand Voser. “The Swiss-accented German is not easier, I assure you,” Putin said. “But I can understand particular sentences in the Swiss dialect.”

Shell also signed a cooperation agreement with Sovcomflot, the state-run owner of Russia’s largest shipping fleet, to provide transport for liquefied natural gas produced on Sakhalin Island and the Yamal Peninsula. Shell launched Russia’s first liquefied natural gas plant in Sakhalin in cooperation with Gazprom in February.

Saturday’s developments were preceded by France’s Total and Novatek, Russia’s largest independent gas producer, sealing a $900 million project to develop a Siberian gas field last Wednesday. Total and Novatek signed a cooperation agreement in May 2007 and had been trying to partner up on projects for the past two years without success.

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