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Gazprom deals with Shell, Russian style

Amy Scott Dec 21, 2006

TESS VIGELAND: Western oil companies have long counted on oil and gas reserves in Russia to keep their pipelines primed. That requires help from the Russian government, which owns the country’s huge gas monopoly Gazprom.

Gazprom had offered a swap with Royal Dutch Shell. But instead it decided to buy control of a natural gas project for $7.5 billion. As Marketplace’s Amy Scott reports, Shell didn’t have much choice in the matter.

AMY SCOTT: This saga centers around a $22 billion natural gas project on the Russian island of Sakhalin. The project is known as Sakhalin-2. And for months Russia’s state gas monopoly Gazprom has been angling to buy a piece.

Shell and its Japanese partners Mitsui and Mitsubishi didn’t want to sell. But the Russian government has raised various roadblocks to slow down the project. Industry analyst Bob Ebel says it was just a matter of time before the companies gave in.

BOB EBEL: I would advise other companies if you get a project in Russia and Gazprom is not involved, find a way to get them involved right from the beginning. Because if you don’t, they will take their share later on.

The sale could hit Shell fairly hard. A few years ago the company got into trouble with regulators for overstating its oil and natural gas reserves. One analyst estimates losing control of Sakhalin-2 could reduce Shell’s reserves by close to 4 percent. The company still holds close to 30 percent of the project. But analyst Denis Maslov with the Eurasia Group says the Russian government’s tactics could chill other foreign investment in the country.

DENIS MASLOV: The atmospherics surrounding Russia and investment in Russia certainly become worse when something like this happens.

But Maslov says Western oil companies can’t afford not to deal with Russia. It’s home to some of the largest oil and gas reserves in the world. He says investing in other energy powers like Venezuela or Nigeria is just as politically risky, If not more so.

In New York, I’m Amy Scott for Marketplace.

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