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Gazprom to pay $7.45 bln for control of Sakhalin II

Environmental regulators on Sakhalin have done their job - Russian energy giant Gazprom will pay Royal Dutch Shell, Mitsubishi and Mitsui $7.45 for Sakhalin II, a few billion dollars less than the market price. Russian President Vladimir Putin congratulated the partners on the bargain, and said that the biggest problems were in the past.

Shell will retain 27.5% minus one share in Sakhalin Energy, the project operator, while its Japanese partners Mitsui and Mitsubishi will control 12.5% and 10% respectively. All contracts for LNG supplies remain in force. A source close to a participant in the deal said it will be completed in February.

Experts have valued the controlling stake at $8-$10 billion. Gazprom used environmental protection as a bargaining tool to get a discount, according to experts. Since August 2005, Sakhalin II has been a target of environmental probes. The Russian Federal Agency for the Management of Mineral Resources, the Federal Agency for Forestry and even the migration service have accused Sakhalin Energy of violations.

The project cost will be increased, however the earlier announced sum of $22 billion until 2045 will be the ceiling, a source close to the deal said. A mechanism will be introduced for the government to claim excess profits from Sakhalin II. For that, oil prices should exceed the price included in the project and approved annually ($36 in 2006). Russian Industry and Energy Minister Viktor Khristenko said the cost problem will be settled in the first quarter of 2007.

"The president and government have played good-cop-bad-cop," said Alexei Makarkin, deputy director general of the Center for Political Technologies. "Everyone expected the worst, while [the authorities] treated investors loyally and promised them substantial compensation," he said. However, the expert said it is clear that the attack on Sakhalin Energy was pre-planned with the Kremlin.

Where will Gazprom get the money? The gas monopoly has approved a $20 billion investment program for 2007, and no purchase of a stake in the Sakhalin II project had been envisaged. As of late October, Gazprom's net debt hit $25.3 billion, according to the gas monopoly.

Today, Gazprom has over $6 billion of idle funds on its balance, said Dmitry Lukashov, an analyst with Alfa Bank. Theoretically, Gazprom could complete the deal by late this year. In any event, its net debt will exceed $30 billion, the expert said.

As the gas giant is eyeing bankrupt oil company Yukos' assets, which will be put up for auction next year, it will have to borrow more. However, this will hardly pose a problem for Gazprom, Lukashov said.

© Vedomosti, a Russian newspaper

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