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Putin buys shell bp to control oil and gas { November 2006 }

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After Shell, Russia now turns on BP

By Edmund Conway
Last Updated: 1:14am GMT 22/12/2006

The Kremlin has moved decisively to take back ownership of Russia's oil-and-gas assets, taking effective control of Royal Dutch Shell's Sakhalin-2 project and issuing a chilling warning to BP about its future in the country.

President Putin personally oversaw the signing of a deal in which Shell will hand over control of Sakhalin to Gazprom, while a key Kremlin official warned BP that it has no choice but to accede to Russian demands with its latest project, or face crippling sanctions. Shell and its Japanese partners accepted a $7.45bn (3.8bn) cash payment for a stake of 50pc plus one share in the project in the far north-east which was until yesterday the biggest single foreign investment in Russia.

Experts hailed Shell chief executive Jeroen van der Veer for securing a good price, but the sale will dramatically reduce the com-pany's reserves. It is particularly troubling for Shell since it was recently embroiled in a scandal over the accounting for its reserves, which led to the departure of previous chief executive Sir Philip Watts.

One analyst had warned that taking cash rather than barrels of oil for Sakhalin would be a "worst case scenario".

But a spokesman said: "This is an acceptable outcome for Shell and ends a period of uncertainty."

Under the Sakhalin deal, Shell will halve its stake from 55pc to 27.5, while Mitsui and Mitsubishi will see their shares cut to 12.5pc and 10pc respectively. The Anglo-Dutch group will continue to contribute to management and will act as a technical adviser to Sakhalin, which is the biggest liquefied natural gas project in the world.

Gazprom chief executive Alexei Miller said: "We, as the main shareholder of the project, will do everything to launch it as soon as possible."

Shell had come under mounting pressure to sell its stake to the Russians, with regulators criticising the company for its environmental and accounting record, and threatening to delay the project.

Now that the project has transferred into Russian hands, these obstacles are expected to disappear, and the resources minister Yuri Trutnev indicated as much last night, saying that the companies should "make the project the best in terms of environmental protection".

All eyes will now turn to BP's Russian joint venture, TNK-BP, which is already coming under increased scrutiny from the Kremlin.

In the latest episode, the head of the federal subsoil agency RosNedra, Anatoly Ledovskikh, has said that TNK-BP must accommodate Gazprom's refusal to let it build a pipeline into China.

"This is not an objective reason to change the licensing agreement... I very much hope that TNK-BP and Gazprom reach an agreement. They have no choice," he said.

The Sakhalin deal was hammered out over the course of three meetings in Moscow between Mr van der Veer and Mr Miller. The two companies had previously mulled plans for Gazprom to take 25pc of Sakhalin in return for a share of its Zapolyarnoye field. But with the Kremlin angry about cost overruns at the project which meant it would not receive as much revenue as expected, Gazprom later won the government's backing to aim for a larger stake.

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