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Shell CEO plays down impact of private Sakhalin deal

Jeroen van der Veer, head of Shell.jpg

Royal Dutch Shell PLC Chief Executive Jeroen van der Veer said Thursday that a confidential deal struck between shareholders in the troubled and expensive Sakhalin-2 oil and gas project and the Russian government may not impact the company's bottom line as much as some think.

Speaking on the sidelines of the World Economic Forum here, Van der Veer refused to confirm media reports that Shell and its partners in the Sakhalin Energy Investment Co. consortium, Mitsui & Co. and Mitsubishi Corp., must shoulder $3.6 billion in costs.

"I realize that the $3.6 billion came in the media. I can't confirm that. This was a very sensitive matter," Van der Veer told reporters.

He added: "It's much more complicated than cost recovery. It's not necessarily the same as a hit on the bottom line. It can even be quite different."

Shell and its partners agreed in December to hand over 50%, plus one share, of the project to Gazprom, the state-controlled Russian giant, for $7.45 billion in cash.

The deal valued the project at about $15 billion, but Shell and its partners have already put $12 billion into the project, which is about 80% complete.

Gazprom took a 50%-plus-one-share stake in operator Sakhalin Energy Investment. Shell, which had owned just over half of SEIC, diluted its stake to 27.5%. Partners Mitsui and Mitsubishi agreed to lower their stakes to 12.5% and 10%, respectively.

The newspaper Vedomosti reported that the Russian government has in principle agreed to approve an increase in the project's development costs to $15.6 billion, but that this is some $3.6 billion short of what the original consortium had estimated.

Vedomosti cited Deputy Industry Minister Andrei Dementyev as saying that the $3.6 billion figure was derived from preliminary estimates made by state-controlled hydrocarbons company Zarubezhneft as to how much of the requested budget increase was justified.

© MarketWatch

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