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Shell and Russia: Tough Love

Royal Dutch Shell is reported to be pursuing a deal with Gazprom, offering the Russian gas monopoly some of its assets in Asia in exchange for expanding Russia’s only liquefied gas export plant on Sakhalin Island. This follows the announcement of Russian oil giant Rosneft's deals with US major ExxonMobil on exploration and development in the Black Sea and with British Petroleum in the Kara Sea in the Arctic.

Shell executives may be drawn to those who hurt them, having still bad memories over their first exposure to Sakhalin where they “agreed” to cede control of Sakhalin-2 to Gazprom in 2006 under government pressure. Still, Shell retained a 27.5% stake in Sakhalin and earned $7.5 billion for selling the controlling block of shares to Gazprom. Now Shell is said to be eager to add a third LNG unit at the Sakhalin-2 facility north of Japan, increasing output at the plant by as much as 50%.

The talks follow an agreement last year to expand cooperation between Shell and Gazprom. Shell may be also looking to participate in the exploration of the nearby Sakhalin-3 and Sakhalin-4 oil and gas projects. Shell officials in London told New Europe that they do not comment on current contract negotiations.

“What draws Shell back in, which is unfortunately the problem for all the majors at the moment, is to try and find untapped areas of resources where they can carry out exploration,” Justin Urquhart Stewart, Director and co-founder of Seven Investment Management, told New Europe from London on 10 February. “Unfortunately there are few places left in the world so you have to go and deal with Russia. Not only just for whether it to be follow the pain that you had to go with Sakhalin again or find yourself eating with an even longer spoon handle that you had before,” he added.

Over the past years, the Law on Strategic Industries in Russia was formulated and signed into law in May 2008. That legislation restricts foreign ownership in strategic industries or projects to either 25% or 49%. But, at the same time, Russian Prime Minister Vladimir Putin has realized that without the involvement of foreign companies it is impossible to launch new Greenfield projects because Russia needs the money and technologies, especially in LNG and shelf projects, Konstantin Simonov, director of the independent National Energy Security Fund in Moscow, told New Europe on 10 February.

Simonov noted that a day earlier Putin urged the government to accelerate work on tax breaks for new oil fields to help maintain the nation’s output. “I don’t know what the final scheme of this exchange of assets will be but we see maybe the restart of relations between Gazprom and Shell. Maybe it will be the restart of our relations with foreign investors. And in my opinion now Putin can be more flexible and he understood that without foreign companies – of course we can speak about resource nationalism but we have no money, we have no technologies – it will be impossible to develop shelf Greenfield projects,” Simonov said. Hate it or love it, Shell has a need in Russian projects and, of course, Putin and Gazprom have a serious need in Shell.

By Kostis Geropoulos

New Europe, February 13, 2011


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Analytical series “The Fuel and Energy Complex of Russia”:

State regulation of the oil and gas sector in 2023, 2024 outlook
Gazprom in the period of expulsion from the European market. Possible evolution of the Russian gas market amid impediments to exports
New Logistics of Russian Oil Business
Russia’s New Energy Strategy: on Paper and in Fact
Outlook for Russian LNG Industry

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