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Shell Game: Anglo-Dutch Firm Deals

Asset Swap, Shell Assets for Sakhalin III Piece

By Kostis Geropoulos: 7 August 2015

Despite Western sanctions against the Russian government and businesses, Europe’s biggest oil company Anglo-Dutch Shell has agreed to swap a stake in one of its international energy assets in exchange for a piece of Gazprom’s Sakhalin III project, which involves developing one of the world’s biggest gas reserves.

The two are still deciding which asset to give the Russian gas monopoly, but the deal strengthens an already solid partnership between the two.

Alexander Kornilov, a senior oil and gas analyst at Moscow’s Alfa Bank, told New Europe by phone on August 6 the deal is driven by the interest of Shell in Russia because the Anglo Dutch company has been a partner of Gazprom in Sakhalin II where Shell holds a stake and “they keep doing business for more than 10 years. So I think the extension up to Sakhalin III seems logical because Shell apparently has experience in Sakhalin offshore development and from that prospective that would logical that Shell would expand its exposure in the Sakhalin area”.

Shell already owns a 27.5% stake in the Sakhalin II gas project, which exports liquefied natural gas to Asia.

“Russia sits on 25% of the world’s gas reserves and is very, very close to markets that we are very familiar with,” Shell CEO Ben Van Beurden said last week, on the sidelines of the company’s earnings presentation. Shell is also pushing “to see how we can work with Gazprom internationally”.

Kornilov reminded that Sakhalin III is primarily earmarked for the extension of the Sakhalin II liquefied natural gas (LNG) plant. “They’re discussing the third train of the existing LNG plant which is also be running under the partnership of Shell and Gazprom under the Sakhalin II PCA agreement and finally the LNG would be earmarked for the Asian-Pacific region primarily so that would definitely give Shell some more exposure to the Asian-Pacific region,” Kornilov told New Europe. At the same time British Gas also used to have a significant portfolio of various LNG projects in that particular region so following the acquisition of BG, Shell also has exposure to Asia Pacific, he added.

Shell, BP and France’s Total are seeking more access to Russia as the country’s low-cost output and proximity to Asian markets outweigh sanctions amid a fall in crude prices.

Shell’s oil and gas production has dropped in 10 of the last 12 years. Russia accounted for about 5% of the producer’s 3.08 million-barrels-a-day output in 2014, according to its annual report.

As far as Gazprom is concerned, the macro environment has changed significantly so the Russian giant no longer plans to develop Sakhalin III on its own and is seeking a partner. “Shell seems pretty logical because Gazprom has long-standing history of cooperation with Shell in Sakhalin, Shell does know Sakhalin very well and from that perspective that would be the best partner that Gazprom could dream of,” Kornilov said.

The Alfa Bank analyst also noted that Gazprom is interested in the asset swap, eyeing stakes in the big variety of LNG projects of Shell globally. “After all Shell has acquired BG, British Gas, and they have expanded maximally their exposure in LNG projects globally so I think from some prospective for Gazprom definitely that would be quite interesting,” Kornilov said.

Despite Western sanctions against Russia following the annexation of Crimea and Moscow’s role in Eastern Ukraine, Gazprom, Shell, Germany’s E.ON and Austria’s OMV also agreed in June to expand the Nord Stream pipeline under the Baltic Sea to Germany, with a annual capacity of 55 billion cubic metres a year. Kornilov reminded that the gas sector is not under sanctions. “It’s business as usual,” he said, adding that the gas business in the Asian Pacific is really attractive, given the expected rise in the LNG consumption there. “It has nothing to do with the politics. They’re just following the path of their best interests in terms of doing business,” he said.

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