Gazprom Joins Sakhalin II

On Thursday, OAO Gazprom (Gazprom), Royal Dutch Shell plc (Shell), Mitsui &Co., Ltd (Mitsui) and Mitsubishi Corporation (Mitsubishi) signed a protocol to bring Gazprom into the Sakhalin Energy Investment Company Ltd. (SEIC) as a leading shareholder. Under the terms of the protocol, Gazprom will acquire a 50% stake plus one share in SEIC for a total cash purchase price of $7.45 billion. The current SEIC partners will each dilute their stakes by 50% to accommodate this transaction, with a proportionate share of the purchase price. Shell will retain a 27.5% stake, with Mitsui and Mitsubishi holding 12.5% and 10% stakes, respectively.

SEIC will remain the operator of the Sakhalin II project. Gazprom will play a leading role as majority shareholder while Shell will continue to significantly contribute to SEIC management and remain as Technical Advisor. The key focus for SEIC is to complete the project on schedule allowing LNG to be delivered to existing customers in Japan, Korea and the North American West Coast. All existing LNG sales contracts will remain in force and will be honored.

Gazprom and existing SEIC shareholders will enter into an Area of Mutual Interest arrangement, which will cover both future Sakhalin oil and gas exploration and production opportunities, and building of Sakhalin II into a regional oil and LNG hub.

The shareholders now look forward to implementing the project in line with the current schedule including obtaining all necessary permits and approvals granted in accordance with applicable Russian legislation and the PSA.

Mitsui President and CEO Shoei Utsuda said: "This is one of the significant milestones in the Sakhalin 2 project and we, Mitsui as a founder of the project, are confident that this will allow the project to move forward on schedule."

Mitsubishi President and CEO Yorihiko Kojima said: "We would like to welcome Gazprom's entry as a new partner. We trust that unity and strength of four shareholders will enable Sakhalin Energy to become a highly valued supplier of LNG and Crude Oil for Asia-Pacific markets."

Shell Chief Executive Jeroen van der Veer commented: "We welcome Gazprom's entry into SEIC as a leading shareholder. Our first priority is to get Sakhalin II up and running. This agreement is an important step forward, and positions Sakhalin II for further growth opportunities."

Chairman of the Board of Gazprom Alexey Miller said: "Gazprom is implementing the strategy of strengthening its positions on LNG markets. Entering Sakhalin II project that involves production and marketing of LNG is an important step towards this objective."

Sakhalin is a new world-class oil and gas province, with estimated resources of some 45 billion barrels oil equivalent. Sakhalin II is the largest integrated oil and gas project in the world, with total resources of some 4 billion barrels oil equivalent.

Sakhalin II today has production capacity of 80,000 barrels oil equivalent per day. The next phase of the development will take the project capacity to 340,000 barrels oil equivalent per day, including 9.6 million tones per year of LNG production.

The second phase of the project is over 80% complete, with some $12 billion invested to end Q3 2006. Over 17,000 people are currently employed in the construction of the project, of which around 70% are Russian nationals. The planned LNG production has been sold under contract to customers across the Asia-Pacific region. Shell is a leader in the global LNG industry, and sets the standard for reliability and cost performance. Sakhalin II is an important component in Shell's global LNG portfolio.

The Sakhalin II project is governed under a PSA, whereby the project partners finance the construction costs of the project, take on the development risk, and recover these costs from sales of oil and gas. So far, some $600 million of royalty, bonuses and taxes have been paid to the Russian government by the end of 2006.

Sakhalin II includes the following elements:

  • Offshore production facilities including the Molikpaq platform (PA-A), the new PA-B and Lun-A platforms and some 300 km of offshore pipelines;
  • An onshore processing facility to take the gas and crude oil from both fields;
  • Two 800 km of onshore oil and gas pipelines to the south of the island;
  • An oil export facility capable of year-round operation;
  • The first LNG plant and associated export facilities built in Russia;
  • Island infrastructure upgrades, such as roads, bridges, rail, port, airport, and medical facility upgrades.

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