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Daily Mail (UK): Shell’s secret cash deal on Sakhalin 2

Sam Fleming,
27 April 2007

Royal Dutch Shell’s defeat at the hands of Gazprom is looking ever more comprehensive.

Earlier this month the Anglo-Dutch oil giant announced it had formally signed over a 50% stake in Sakhalin 2 – the world’s biggest oil and gas export project – to the Kremlin controlled giant.

Now it has emerged that it made additional financial concessions to the Russian state that weren’t disclosed at the time.

The company admitted that from next year the project in the north Pacific will have to pay hundreds of millions of pounds to the Russian government, in a thinly-disguised tax.

Shell claimed the payments would not be ‘material’ to its financial performance.

But the original ‘Production Sharing Agreement’ (PSA) it signed with Russia in 1994 provided that the government wouldn’t claim payments until Shell and its partners had recouped all the costs of building the massive project.

At the last count, those amounted to an extraordinary £10bn. Now payments to the state will start from the moment gas begins pumping from Sakhalin 2.

Under the agreement, Shell and its Sakhalin-2 partners will pay a fixed dividend of several hundred million dollars a year. After a set period the payments will begin to fluctuate according to the level of the oil price.

A Shell spokesman said: ‘We don’t comment on contract terms in general, since they are confidential.

‘There have been minor adjustments to the fiscal terms that whilst keeping the PSA intact give the Russian federal government more access to revenues when oil and gas prices are high.

‘There isn’t a material impact to the value of Sakhalin 2 for Shell as a result of those negotiations.’

Shell ceded control of Sakhalin 2 to Gazprom after a stand- off lasting several months with the Russian environmental authorities.

It received around £2bn for its stake in the project, and also signed an agreement with its Russian adversary under which the two firms will seek other energy projects around the remote island.

The dispute escalated into a major diplomatic incident and underlined the souring relations between Russia and the west.

http://www.thisismoney.co.uk/investing-and-markets/article.html?in_article_id=419788&in_page_id=3

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