Russian Energy Sector Wheeling and Dealing

Royal Dutch Shell and Gazprom have made progress in recent negotiations in the $20 billion Saklain-2 project. The CEO of Shell, Jeroen van der Veer, has made three trips to Moscow in three weeks, possibly suggesting that a deal between the two companies is soon to come.

The original offer from Gazprom was a share of its Zapolyarnoye field to Shell as a trade for 25 percent of Sakhalin-2. Sakhalin-2 is the biggest LGN (Liquefied Natural Gas) project in the world. According to Shell, the project’s costs had doubled, which caused the negotiations between Shell/Mitsui/Mitsubishi and Gazprom to be revisited. Gazprom is looking for a 50% share of Sakhalin-2, while Shell is only willing to give up 30% of the 55% stake it owns.

The increase in project costs is bad for Russia because it means there will be a longer wait for smaller profits, causing Russian officials to pressure Shell to follow through with the deal. Sakhalin Energy feels that the delay will cause problems with the delivery of LNG to Japan, South Korea and the United States.

Gazprom has grown significantly in the past couple of years. If the company can get involved in the LNG area, the Kremlin will have firm control of Russia’s energy sector. Gazprom has also been talking about offering an invitation to Mitsui and Mitsubishi to get involved in a LNG project on the Baltic Sea in exchange for some of their Sakhalin-2 shares.

This entry was posted on Thursday, December 21st, 2006 at 11:35 pm. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.