President of the Shell Russian subdivision John Barry.
Photo: Dmitry Lebedev
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The Case of Yamal
// What Can Shell Get from Gazprom in Exchange for Sakhalin?
Foreign Investments
Yesterday, president of the Shell Russian subdivision John Barry in the interview with Britain’s Financial Times for the first time acknowledged that negotiations are underway with Gazprom on including the latter in Sakhalin-2 project shareholders. The exchange of Shell Sakhalin-2 assets for access to the development of the Zapolyarnoe gas condensate field by Gazprom can take place before the end of the year. This transaction, worth $3 billion, can give Gazprom quick access to the market for liquefied natural gas (LN gas) in Asia and will consolidate the destruction of the Russian company's gas export monopoly by 2010.
In his interview with FT, John Barry, president of Shell E&P Services RF, said that negotiations with Gazprom were at the last stage. The decision on Gazprom taking a share in Sakhalin-2 will be made before the end of the year. “This transaction must be balanced out somehow. Gazprom also must share something it owns,” he said. He did not specify what share could be given to Gazprom in Sakhalin Energy Investment Co. (SEIC). However, he did mention that a 20-percent share of Rosneft in Sakhalin-1 project, managed by ExxonMobil, “would allow the Russian partner to join the project.”
The occasion of the interview given by Barry was the outcome of RF Prime Minister Mikhail Fradkov's negotiations with Royal Dutch/Shell leadership on September 29 in The Netherlands. According to Kommersant, the topic of the meeting was a possible exchange between Shell and Gazprom of 20 percent of SEIC shares, owned by Shell, for the right to the controlling interest in the project to develop Neocomian deposits in Zapolyarnoe fields of Yamalo-Nenets Autonomous Area. Gazprom has been developing Senoman (superficial) condensate deposits in Zapolyarnoe since 1996.
An agreement to create a joint enterprise for the development of the Zapolyarnoe Neocomian deposits was signed by Gazprom and Shell in November 1997 by Barry’s predecessor Mark Leonardo and Rem Vyakhirev, who headed Gazprom at that time. It expired in 2003. There is also a possibility that Fradkov discussed the opportunity to exchange SEIC shares for control over the Zapolyarnoe-Neocom project with the chairman of the Shell managing committee Jeroen van der Veer and managing director Malcolm Brinded.
Shell has already made public negotiations with Gazprom on this issue, and Fradkov brought Russia’s finalized conditions on the transaction to The Hague, to be discussed next month by Shell’s supervisory board. The decision will probably be made after the end of negotiations between Shell and the Korean KOGAS, which is also currently negotiating the purchase of 20 percent of SEIG. Yesterday, KOGAS announced the end of the first round of the tender on supplying LN gas to that country beginning in 2007. Neil Theobald, representative of Gordon LNG, controlled by ChevronTexaco, which had the highest chances of winning the tender, has already mentioned that his company make it into the second round, which was worth $23 billion. This raises SEIC’s chances. It also applied for the tender, and Shell could exchange SEIC shares for shares of KOGAS, which is to be privatized in 2005-2006. Let us emphasize that Gazprom is also holding negotiations with the Korean party.
If Gazprom is able to exchange its share in Zapolyarnoe-Neocom for 20-25 percent of SEIC (sources in Gazprom state they are willing to not have the controlling interest in SEIC), the gas monopoly will be able to begin supplies of LN gas to Asian markets in 2007, when a factory to produce LN gas south of Sakhalin will begin functioning. Such an exchange is fair: Zapolyarnoe Neocom supplies about 2.6 trillion cubic meters, not counting oil rim. However, Gazprom will get a share in the project already being realized, which has had $8.5 billion invested into it.
The announced merger of Gazprom and Rosneft will also substantially increase Gazprom’s reputation on the fuel market. Rosneft owns survey licenses for oil and gas production in the Sakhalin shelf, as well as a 20-percent share in Sakhalin-1. There is a possibility that Gazprom needs the share in Sakhalin-2 as an argument in the government conflict around the Gazprom and Rosneft merger. Rosneft president Sergey Bogdanchikov, currently visiting the Far East, said yesterday at Yuzhno-Sakhalinsk that the merger with Gazprom would not reflect on the local plans of Rosneft. There is also a possibility that the transaction between Shell and Gazprom will influence this viewpoint.
Shell has more to gain from the possible transaction than simply access to the deposits of Zaplolyarnoe-Neokom. Shell insists on having the right to export the gas produced (14 billion cubic meters a year at the peak of production in 2010) to the Western European market through Gazprom pipelines, rather than being restricted to supplying it to Russia only. Most likely, Shell will get this right, despite the fact that it will contradict Gazprom’s export principles. Gazprom has already practically announced the destruction of this monopoly by signing an agreement on joint development of deposits in Southern Russia with the daughter company of the German concern E.ON, Ruhrgas, in July.
Obviously, the principle of being “the single gas supplier from Russia” is not as important to Gazprom in the short-term perspective as gaining access to the growing market of LN gas. Today, Gazprom chairman of the board Aleksey Miller is to sign a memorandum on developing a technical and economic assessment on building a factory of LN gas in Leningrad Region with the Canadian company PetroCanada. Before the end of the year, Gazprom will also continue negotiations with ExxonMobil, ChevronTexaco and the Norwegian Statoil on joint realization of the project at the Stockman deposit field.
Let us emphasize that, according to Shell's prognosis, after 2011, growth rates of the gas supply to the world market will exceed rates of supplies through pipelines and, in the period of 2011 to 2030, the world market for LN gas will grow by five times and will catch up with the volumes of gas imported by world consumers through pipelines.
Dmitry Butrin
All the Article in Russian as of Oct. 12, 2004
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