Shell, Gazprom Reportedly in Talks to Expand Sakhalin-2 LNG Plant
Andrew Neff
1222 words
9 February 2011
IHS Global Insight Daily Analysis
IHS World Markets Energy Perspective
Citing unnamed sources close to negotiations, Bloomberg reported yesterday that Shell and Gazprom are discussing a deal that would add a third LNG train at their Sakhalin-2 venture in exchange for
equity stakes in Shell's projects in Asia.
Implications
An agreement to expand the Sakhalin-2 LNG plant's capacity by adding a third liquefaction unit would enhance Russia's ability to export LNG into the Asia-Pacific market. It would also significantly strengthen Shell's relationship with Gazprom.
Outlook
A potential deal to increase capacity at the Sakhalin-2 LNG plant could serve as the basis for a broader strategic alliance between Gazprom and Shell, reflecting the new trend among international oil companies (IOCs) to partner directly with state-owned Russian energy companies.
Following the Leader?
Less than one month since BP again broke the mould for dealing with Russia by announcing a landmark share swap and Arctic exploration alliance with state-run Rosneft, the other supermajors are taking
steps to shore up their Russian project portfolios. Two weeks ago, ExxonMobil made a splash with its commitment to invest US$1 billion in an offshore Black Sea exploration venture with Rosneft, while
yesterday reports surfaced that Shell is negotiating its own swap agreement with Gazprom that could allow the Russian gas giant to expand into Asia in exchange for giving its consent to a capacity expansion on the Sakhalin-2 LNG plant in Russia's Far East. The herd mentality of the supermajors is alive and well.
Sakhalin Energy Consortium
Company Stake
Gazprom 50%+1
Shell 27.5%
Mitsui 12.5%
Mitsubishi 10%
Shell, however, is likely to bristle at the notion that it is following BP's lead in looking to form an alliance with Gazprom. Indeed, the Dutch/U.K. supermajor can certainly claim to be blazing its own path in Russia, where the company has a successful Siberian oil production venture at the Salym fields and has weathered a much-publicised political storm to bring the Sakhalin-2 project into
operation. It is true that Shell suffered the embarrassment of being essentially forced to sell control of that LNG project to Gazprom, but rather than exit Russia as a result, Shell, together with its Japanese partners in the Sakhalin Energy consortium, Mitsui and Mitsubishi (see table), has kept its head down and stayed the course, ensuring the successful launch of exports in early 2009 from the 9.6-million-tonne/year LNG plant at Prigorodnoye.
The company's reward for its loyalty to Russia, at least thus far, has been a series of empty promises from Russian officialdom. Although Russian prime minister Vladimir Putin said he welcomed Shell's participation in future Sakhalin projects, none have materialised in the nearly two years since Sakhalin-2as launched. Similarly, talk of Shell's involvement in the development of Yamal Peninsula gas projects has been just that—talk. Meanwhile, BP, ExxonMobil, and even Chevron, which signed a Black Sea exploration venture of its own with Rosneft last June, have stolen all the headlines in striking deals directly with Rosneft (see Related Articles). Shell's own co-operation agreement with Rosneft has netted the Dutch/U.K. supermajor a total of zero tangible projects to date.
Shell's relative lack of success in generating new business in Russia, despite repeated statements by company officials insisting on the company's commitment to Russia, must surely be a source of frustration, but this in itself may also be prompting a change in strategy. Since Shell has not walked away from Russia—unlike ConocoPhillips, which now has sold its last remaining stake in LUKoil—but at the same time has not managed to expand its Russian project portfolio, it seems that new engagement tactics are needed. A Bloomberg report yesterday suggests that Shell, reluctantly, may be adopting similar tactics as BP in an effort to gain traction in Russia. The report stated that Shell is potentially willing to offer Gazprom assets in Asia in exchange for the Russian gas
firm's consent to build a third LNG train at the Prigorodnoye plant. A deal, if consummated and implemented, could then serve as the basis for a wider strategic alliance between the two firms, in Russia and beyond.
Outlook and Implications
Gazprom has not commented on the report, but Bloomberg cited Vera Surzhenko, a spokeswoman at Shell in Moscow, as saying the companies are "considering opportunities". The report did not identify any specific Shell assets in Asia that Gazprom might receive in a potential deal, but the Russian gas firm would surely be keen to join in Shell's LNG export projects in Australia, where Gazprom would certainly have a strategic interest, given the company's intention to expand its own LNG exports in
the Asia-Pacific market. Indeed, with Gazprom's own plans to boost gas exports to China and target markets in South Korea, Japan, and India over the next 20 years, an alliance with Shell that boosts capacity on the US$22-billion Prigorodnoye LNG plant and secures equity participation for the Russian firm in some rival supply projects would be a win-win situation.
For Shell's part, the company could broaden its LNG supply base in the region by securing consent from Gazprom to expand the Prigorodnoye plant, as well as potentially gain access to additional offshore blocks to provide gas for the liquefaction facility. More than 85% of Sakhalin Energy's output from the Prigorodnoye plant is already spoken for under long-term supply contracts, but with the Asian-Pacific gas market expected to continue to grow, adding a third LNG train at Prigorodnoye
seems to make economic as well as strategic sense. What is more, a deal that strengthens the tenuous bonds between Shell and Gazprom can only be good for the Dutch/U.K. supermajor, particularly if it
opens the door to other projects for Shell in Russia with Gazprom.
Shell may object to suggestions that it is following in BP's footsteps in Russia, but the parallels between BP's travails (and now triumph with the Rosneft deal) and Shell's experience at Sakhalin-2 are unmistakable. Just as BP slogged its way through the TNK-BP shareholder dispute (and before that
its Sidanco struggle) and now is likely to find redemption for its commitment to Russia with a partnership with Rosneft, so Shell is hoping that its perseverance in sticking with the Sakhalin-2
venture will allow it to forge a stronger relationship with Gazprom. Shell is already working closer with the state-run gas giant in the Salym venture, where Gazprom's oil arm, Gazprom Neft, has bought
out Sibir Energy, Shell's partner in the project. With BP's own attempt to form a strategic alliance with Gazprom having fallen by the wayside, Shell is aiming to better its rival by clinching the wide-ranging partnership deal with the Russian gas giant that BP could not.