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Shell May Seek New Sakhalin Accord, Russia Audit Says

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Royal Dutch Shell Plc and its partners in the $22 billion Sakhalin-2 oil and gas venture may seek to agree with Russia on a new accord to clear the way for state-run OAO Gazprom to take a stake in the project.

Shell plans to offer to sign a supplementary deal to the existing production-sharing agreement under which it operates Sakhalin-2, the Russian Audit Chamber said today on its Web site, citing Anthony Brenton, the U.K. ambassador to Russia. Sergei Stepashin, head of the Audit Chamber, discussed Sakhalin-2 with Brenton yesterday, the chamber said.

The British Embassy declined to confirm or deny that any such proposals were being considered. An embassy spokesman who declined to be identified said the Audit Chamber statement was inaccurate. He didn't say which parts of the statement were misleading. Shell spokesman Jonathan Charles in London declined to comment.

President Vladimir Putin said Oct. 22 Russia and Shell should settle budget and environmental disputes that threaten to halt work on Sakhalin-2, the nation's largest foreign-owned oil and gas project. Gazprom had suspended talks to take a stake in Sakhalin-2 after Shell sought last year to raise the spending plan for the project to $22 billion from $12 billion.

Shell, BP Plc, Exxon Mobil Corp. and Total SA have faced increased scrutiny of environmental and licensing compliance amid demands from Russia to cede more control of energy projects to state-aligned companies such as Gazprom.

Talks With Gazprom

Shell and Gazprom had initially agreed in July last year on an asset swap that would give Gazprom a 25 percent stake in Sakhalin-2 and Shell a 50 percent stake in a Siberian gas field, though talks stalled when Shell later said costs for the project's second phase had doubled to $20 billion.

"Discussions continue with the relevant bodies regarding the cost overruns and how to include Gazprom in the project,'' Shell Chief Financial Officer Peter Voser said Oct. 26 during a third- quarter earnings conference call.

The Sakhalin project's environmental record has faced "unprecedented scrutiny,'' with 200 audits so far this year, Voser said last week. He said the joint venture company, Sakhalin Energy, has identified some instances of ``non-compliance with permits by pipeline contractors'' and that a resolution of those issues is "a top priority.''

Voser also said last week that he expects the project's cost recovery to be completed by 2013, which is five years after liquefied natural gas exports are scheduled to start.

The project, which is owned 55 percent by Shell and the rest by Japanese partners Mitsui & Co. and Mitsubishi Corp., began with a production-sharing agreement signed in 1994, when oil prices were lower and Russia was eager to attract foreign investors. Now, some Russian officials say the contract is unfair because it allows the foreign companies to recoup all expenditures before Russia gets a share of profits.

© Bloomberg

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