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Shell, Gazprom trade for Sakhalin share Russian company gets share of huge LNG operation, while Shell acquires half of Siberian Zapolyarnoye deposit Allen Baker Petroleum News Contributing Writer
Shell has signed a deal with Gazprom giving the Russian firm a quarter of the Shell-led Sakhalin 2 project. Shell will take a 50 percent share in the Zapolyarnoye Neocomium field in Siberia in return.
The long-expected move gives Gazprom leader Alexey Miller an entry to learn the nuts and bolts of the liquefied natural gas business, where his company is hoping to be a world player in short order.
It “opens the way for Gazprom to become in the nearest future a large shareholder of a fast growing project for hydrocarbons development, LNG production and sale to strategic markets in North America and Asia-Pacific Region,” Miller after the July 7 signing ceremony for the Memorandum of Understanding. Sakhalin 2 is set to be the world’s largest LNG exporter. Strategic partnership For Shell, the plusses may be a little less concrete, but they’re still potentially pivotal. Plus, a refusal to go along could have created all sorts of complications given the current political climate in Moscow, where petroleum developments are now expected to include stakes by Russian companies.
With the deal, Shell has cemented a partnership with the Gazprom — both the globe’s largest natural gas company, with a fifth of the world’s reserves, and soon to be majority controlled by the Russian government.
If the relationship prospers, Shell could get a leg up when Moscow-based Gazprom begins development of the super-giant Shtokman field in the Barents Sea with its 100 trillion cubic feet of gas reserves.
The agreement “strengthens the good relationship between Shell and Gazprom and is a basis for further cooperation on integrated gas projects both in Russia and internationally,” said Jeroen van der Veer, chief executive of the Royal Dutch/Shell Group of Cos., currently headquartered in London and Holland.
Shell will retain the operator’s slot and the largest slice of Sakhalin 2, a 30 percent share. Gazprom will acquire up to 25 percent plus one share, a blocking stake. Japan’s Mitsui & Co. has 25 percent and Mitsubishi Corp. the remaining 20 percent.
The Zapolyarnoye interest is actually a lower reservoir of the existing field that now produces about a billion cubic feet of gas daily, a fifth of Gazprom’s output. But the lower reserve is a more challenging target, and Gazprom can use Shell’s technical expertise there. For Shell, it cements the company’s Siberian presence, where it already has the Salym field. Gain for Shell reserves With 3 billion barrels of oil equivalent in the Zapolyarnoye pools, Shell will be able to book 1.5 billion barrels of reserves, while subtracting a billion boe for the 25 percent of Sakhalin 2 it’s losing. So that’s a net gain of 500 million boe in Shell’s battered reserves column.
Shell will also collect cash or other assets to reflect the difference in value between the two properties. A joint committee will hammer out the details, with a definitive agreement based on the MOU expected next year. Sakhalin consolidation With the bridgehead at Sakhalin 2, Gazprom could become a player in all three major Sakhalin projects, providing impressive export potential to the exploding Asian market as well as the U.S. West Coast.
Gazprom has said it will bid on the undeveloped Sakhalin 3, where ChevronTexaco and ExxonMobil had the rug pulled out from under them after winning earlier bids that were invalidated by the Russian government.
Gazprom also has its eye on state-owned Rosneft’s 20 percent stake in Sakhalin 1, led by ExxonMobil. That project, expected to start producing this summer, holds an estimated 2.3 billion barrels of oil and 17 tcf of natural gas. Exxon Neftegaz is the operator and holds 30 percent, with a Japanese consortium also owning 30 percent and India’s state-owned ONGC at 20 percent.
Natural gas from that field will initially go to Russia, but there is far more gas potential than the domestic market can absorb. The original plan called for a subsea pipeline to Japan. But with LNG from Sakhalin 2 capturing big chunks of that market, ExxonMobil is now talking with state-controlled China National Petroleum Corp. about a pipeline to supply that country’s industrial northeast. Preliminary indications are that the pipeline would move around 280 billion cubic feet of gas annually. The parties are hoping to cement a deal this year.
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