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Gazprom saves $3.6 billion on Sakhalin II

New details have emerged about the deal between Gazprom, Shell, Mitsubishi and Mitsui. The government, it turns out, stipulated that the foreign companies invest $3.6 billion in Sakhalin II, and no compensation is provided for under the production-sharing agreement. Experts say this actually reduces the cost of the deal.

A week ago, when the agreement on the Russian gas monopoly's purchase of a stake in Sakhalin II, worth $7.45 billion plus one share, was signed in the Kremlin in the presence of President Vladimir Putin, only part of the deal was disclosed.

A government official said that last Thursday representatives of Shell, Mitsui, Mitsubishi and the Russian Industry and Energy Ministry signed a protocol on the new budget estimate for Sakhalin II, which was also approved by Putin. The source said the parties agreed to increase the operating budget to $19.4 billion for the period between now and 2014. The foreign investors should also sign an agreement that commits them to paying an additional $3.6 billion for the project.

A manager close to a shareholder in the project said that the $3.6 billion will be divided between the three foreign shareholders in proportion to their investment in the project. Gazprom will be exempt from the burden.

Deputy Industry and Energy Minister Andrei Dementyev said experts from his ministry and Zarubezhneft, a state-controlled overseas oil projects operator, which was instructed to substantiate the costs included in the new budget by Sakhalin Energy, the project operator, calculated so that investors could have avoided costs unrelated to market factors, such as changes to engineering solutions along the pipeline route. "We reckoned that foreign shareholders should undertake engineering risks, and they have agreed to that," Dementyev said.

The $3.6 billion of capital investment expected from the foreigner companies will go to Gazprom and the government, and the sum will not affect production sharing, said Solid brokerage analyst Denis Borisov. Gazprom will be able to invest less in the project, which will not have a one-off effect, as the investment will be for the period until 2014.

If the foreign investors pay $3.6 billion of their own money, they will only be able to receive a profit from the project two to three years later, said Mikhail Subbotin, director of PSA-Expertise.

No one at Mitsui, Mitsubishi, Shell or Sakhalin Energy was available for comment.

© Vedomosti, a Russian newspaper

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