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    Wrap: Gazprom becomes Sakhalin II majority shareholder

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    Gazprom [RTS: GAZP] has purchased 50% plus one share of Sakhalin Energy, the project operator of the major Sakhalin II oil and gas project off Russia's Pacific Coast, for $7.45 billion, the Russian energy giant's CEO said Thursday.

    MOSCOW, December 21 (RIA Novosti) - Gazprom [RTS: GAZP] has purchased 50% plus one share of Sakhalin Energy, the project operator of the major Sakhalin II oil and gas project off Russia's Pacific Coast, for $7.45 billion, the Russian energy giant's CEO said Thursday.

    "Gazprom becomes the project's majority shareholder and will jointly work with other shareholders to launch it as soon as possible," Alexei Miller said at a meeting between Russian President Vladimir Putin and top executives of the companies involved in the project.

    Miller said Gazprom had been conducting talks with Shell on Sakhalin II and production of liquefied natural gas for two years.

    Shell said it sold Gazprom 27.5% of its shares, Mitsui sold 12.5%, and Mitsubishi 10% in the capital of Sakhalin Energy.

    Gazprom will pay cash for the purchase, Shell's CEO said Thursday.

    Jeroen van der Veer said his company, the former Sakhalin Energy majority shareholder, will receive the money in the near future.

    Gazprom said it will have no problem raising the required funds and that it was paying a "fair market price."

    An increase in the estimated cost of the Sakhalin II project will not cut into Russia's income, since the project investor assumes the risks, the Russian industry and energy minister said Thursday.

    "The increase of the project's cost estimate will not affect Russia's revenues," Viktor Khristenko said. "The investor [in the project] will bear the risks, and the project remains viable and attractive."

    The minister added that investors developed an environmental protection program under the project.

    "As for the ecology, the investor, by request of the Ministry of Natural Resources, prepared a comprehensive program of environmental protection measures," he said. "The program aims to address serious but fair complaints from Russian [environmental] watchdogs, and to prevent similar situations in the future."

    The Russian government fully supports Gazprom's decision to join the Sakhalin II energy project, President Vladimir Putin said.

    "We will do everything possible to assist you [Gazprom]," he said.

    Previously, British-Dutch oil major Shell held a 55% stake in the operator, and Japan's Mitsui and Mitsubishi owned 25% and 20%, respectively.

    Sakhalin Energy is developing the $22 billion oil and liquefied natural gas (LNG) project under a production-sharing agreement (PSA) with the Russian government, signed in 1994.

    Shell's doubling of its project cost estimate to $22 billion previously infuriated Russian authorities and scuttled an earlier agreement on an asset swap that would have given Gazprom a 25% stake in Sakhalin II. But this time, participants in the project have decided to assume all risks related to the project.

    Putin said Russia is satisfied with the investors' decision to cover all risks under the project.

    "I am certain that we can overcome all difficulties if all sides show goodwill," the Russian leader said.

    Sakhalin II comprises an oil field with associated gas, a natural gas field with associated condensate production, a pipeline, a liquefied natural gas plant and an LNG export terminal. Most of the LNG from the project will be exported to Japan, which is seeking to diversify its energy imports.

    The two fields have estimated reserves of 150 million metric tons (1.1 billion barrels) of oil and 500 billion cubic meters of natural gas.

    Sakhalin Energy experienced months of intense pressure from Russian authorities, who have accused it of causing serious environmental damage to Sakhalin Island, including deforestation, toxic waste dumping and soil erosion.

    In September, the Russian Natural Resources Ministry canceled its 2003 environmental approval of Sakhalin II. Russia's environmental watchdog said that court proceedings on compensation for environmental damage, estimated at between $10 billion and $30 billion, would most likely begin in March 2007.

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