Deputy Minister: Gazprom to Pay Cash for Sakhalin-2 Stake

MOSCOW, Dec 20, 2006 (Dow Jones Newswires)

Russian natural gas monopoly OAO Gazprom (GSPBEX.RS) will purchase a stake in the Sakhalin-2 oil and gas development with cash, deputy minister of industry and energy Andrei Dementyev said Wednesday, according to Russian news agency Interfax.

Gazprom has been holding talks with Royal Dutch Shell PLC (RDSB) on the Russian gas giant's entry into Sakhalin-2 for months, although talks have intensified in recent days.

Earlier, talks had focused around swapping a stake in Sakhalin-2 for a stake in Gazprom's massive Zapolyarnoye gas field in northern Russia.

A senior Gazprom executive said Tuesday he hoped to strike an agreement with Shell this week.

Asked Wednesday how state-controlled Gazprom planned to enter Sakhalin-2, Dementyev said: "It will buy (the stake) for cash."

A Shell spokesman declined to say whether Shell was still interested in swapping assets for a stake in Zapolyarnoye. No one at Gazprom was immediately available for comment.

Gazprom has said in the past it will only give foreign companies equity stakes in its upstream reserves in exchange for other assets, especially downstream assets - but the company has said it doesn't plan on selling any of its reserves cash.

A spokesman for the ministry confirmed Dementyev's comments to Dow Jones Newswires Tuesday, and added that no final agreement has been reached between Gazprom and Shell.

Shell holds 55% of Sakhalin Energy Ltd., the international consortium developing Sakhalin-2.

Dementyev said that Sakhalin-2 shareholders were set to meet with Russian minister of industry and energy, Viktor Khristenko, Thursday or Friday this week.

Credit agency Fitch Ratings said Tuesday that Shell's reserve replacement may come under pressure if it cedes control of Sakhalin-2 to Gazprom.

Under International Financial Reporting Standards, or IFRS, the Anglo-Dutch major books 100% of the reserves brought from the units it operates.

But Shell won't be allowed to book all of Sakhalin-2's reserves if it loses a majority stake, Shell said Tuesday. Instead, reserves would be booked in proportion to Shell's stake.

It remains unclear how much of Sakhalin Energy Shell will retain. Gazprom has said it could be content with less than a 50% stake in Sakhalin Energy, and analysts have questioned the Russian gas giant's ability to operate an offshore development of liquefied natural gas, a task in which the company has no prior experience.

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