Publication: Eurasia Daily Monitor Volume: 4 Issue: 2

The Gazprom building in Moscow.

A two-part deal — one publicized on December 21 and thereafter, the other confidential but leaked by Moscow on December 28 — has sealed Gazprom’s seizure of the majority stake in the Royal Dutch Shell-led oil and gas project Sakhalin-2. Shell, hitherto the project operator, surrendered under the threat of multibillion-dollar environmental-damage suits and revocation of licenses by the Kremlin-unleashed Nature Inspectorate, in a largely farcical campaign (see EDM, December 13, 15).

The deal radically changes the 1994 production-sharing agreement. Gazprom, forcing its entry into the project, takes over 51% plus one share; Shell’s stake falls from 55% to 27.5%, while Shell’s Japanese partners Mitsui and Mitsubishi reduce their stakes to 12.5% and 10%, respectively. Gazprom is supposed to pay $7.45 billion for its stake, a price clearly below the international market value. The Russian company itself has implicitly valued Sakhalin-2 at $20 billion in the project’s budget, adopted also on December 21 (Interfax, December 21-28).

Meanwhile, a secret protocol to the agreement stipulates that the three now-minority shareholding companies shall meet an additional $3.6 billion in project costs. This seems intended to enable Gazprom to defer that portion of its payment until the project begins generating profits and then use its share of profits to pay the original shareholders. Thus, in practice, Gazprom will only pay one half of the acquisition price upfront and the other half later, deducted from what would have been Shell’s and the minority Japanese partners’ profits under the original production-sharing agreement.

Russia’s Deputy Industry and Energy Minister Andrei Dementiev disclosed the secret protocol in the December 28 issue of the Moscow daily Vedomosti; a Ministry spokesman confirmed it; and a peeved Shell spokesman only commented that the company does not disclose confidential agreements. One unanswered question is when would the company have disclosed the full information to its own shareholders.

On December 21 in the Kremlin, President Vladimir Putin held court over Shell president Jeroen van der Veer, the Japanese executives, and those of Gazprom. The scene resembled that enacted by Putin with Ukraine’s hapless energy team when signing their gas supply agreements on January 2, 2006. Pretending to take an equidistant position between Gazprom and its blackmailed partners, Putin spoke with barely disguised sarcasm: “I know that Shell invited Gazprom to cooperate on the Sakhalin-2 project … It is a corporate decision for Gazprom to participate in this project. The Russian government was notified of this decision and did not object to it. In fact, it welcomed it.” As in the scene with the Ukrainians, Putin gave the floor to the participants to receive their thanks. “Thank you for supporting this truly historic event,” Van der Veer had to say. “We sincerely welcome Gazprom in the project. [We] are grateful to the [Natural Resources] Minister for assisting us in searching for the right way to solve problems … Mr. Putin, I am grateful for your assistance” (, December 21).

Putin’s remarks during the meeting have generally been interpreted as declaring the environmental issues to have been resolved, almost as expeditiously as they had been raised. However, Putin sounded deliberately ambiguous: “I have been told that the issue can be regarded as almost settled, in principle.” On the following day, Gazprom vice-president Alexander Medvedev told a news conference that a special working group including the Natural Resources Ministry, Gazprom, and the three foreign companies will be formed to assess the environmental problems and a budget for remedying those problems (Interfax, December 22). Thus, the environmental issues are not off the agenda and can again be misused by the Kremlin as a pressure tool against foreign partners in this and other projects.

The Sakhalin-2 project holds estimated offshore reserves of 150 million tons of oil and 500 billion cubic meters of gas. The project involves two offshore drilling platforms, the first gas liquefaction plant in Russia, two pipelines of 800 kilometers in length, and a maritime export terminal. Commercial production of oil was to have started in 2006, reaching 8 million tons annually by 2008 and thereafter. Liquefied natural gas output is planned at 9.6 million tons annually from 2008 onward. Sakhalin-2 was one of only two exceptions to Gazprom’s monopoly on gas exports from Russia. The other exception is the Sakhalin-1 project, operated by ExxonMobil in partnership with Rosneft, and incrementally pressured by Russian authorities as well.