[A-List] Russia: capitalism's new frontier

["Michael Keaney" <michael.keaney@xxxxxx>]

Shell joins $10bn Russian gas rush

David Gow
Friday May 16, 2003
The Guardian

Shell yesterday committed a substantial part of its future growth to Russia
by giving the go-ahead to plans by a consortium to build a $10bn (£6bn)
liquefied natural gas plant in the country's far east.

The company, which also hopes to develop vast oil reserves in western
Siberia, is to invest $5.5bn in the second phase of an oil and gas project
on Sakhalin island aimed at capturing a quarter of the east Asian LNG market
by the end of the decade.

Sir Phil Watts, Shell's chairman, said the green light for Sakhalin 2 was a
"major milestone" for the company and represented the world's largest
integrated oil and gas project - as well as the biggest single foreign
direct investment in Russia.

Russia was a substantial energy resource holder and he "could not see the
future of Shell as a global company without a significant investment
position there".

Putting to one side worries about political and economic stability in
Russia, western oil companies are investing billions of dollars, with BP
agreeing earlier this year to buy 50% of the country's third largest oil
firm, TNK, for $6.75bn.

The Russian government has been promoting mergers among the country's
indigenous producers to meet foreign competition but Sir Phil said full
agreement had been reached with the authorities on legal and other issues
that had dogged the Sakhalin project in the recent past.

The Russian state is expected to receive $45bn during the lifetime of the
project, which is being developed under a production sharing agreement,
while Russian "content" in the form of businesses, materials and contracts
is expected to be 70%.

Shell's investment as a 55% shareholder in Sakhalin Energy will boost its
10m tonnes of LNG capacity, already the world's largest, by more than a half
and bring its gas reserves of 55 trillion cubic feet closer to 65 trillion.

But Sir Phil refused to divulge the expected rate of return or Russia's tax
take, insisting that the agreement with Moscow justified the project in
terms of profitability. Shell's share of the finances is to be funded within
its annual $12bn capital spend.

The Anglo-Dutch group's partners are Japanese groups Mitsui (25%) and
Mitsubishi (20%), which are promoting LNG as an alternative energy source
across Asia.

The consortium has already signed an agreement with Tokyo Gas to supply just
over 1m tonnes of LNG a year for 25 years, triggering the go-ahead for the
project. Sir Phil said recent problems in Japan's nuclear power industry,
with several plants shut on safety grounds, had prompted cus tomers to look
to other fuels, with talks already under way.

Sakhalin, which already produces 10m barrels of oil from an offshore
platform, will now see a 9.6m tonne LNG plant, two new offshore platforms,
two 850km pipelines and a new terminal.