Shell, Gazprom Eye $1Bln Deal

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With its coffers full of petrodollars and a production sharing agreement expected soon, Anglo-Dutch oil major Shell said Monday it is ready to invest up to $1 billion in a project to boost natural gas monopoly Gazprom?s exports to West Europe.

Maxim Schub, press officer for Royal Dutch/Shell, said the investment would be used to develop the Zapolyarnoye gas field in northern Siberia?s Yamal-Nenets autonomous region.

Although Gazprom and Shell formed a strategic partnership to develop the field in 1997, Shell only made a financial commitment to the project this year.

"We are anticipating participating in large-scale projects with Gazprom. We will be celebrating the fourth year of our partnership with Gazprom in a few days," Schub said.

Russia desperately needs a strong foreign partner if it is to increase exports of hydrocarbons, mainly natural gas, to the European Union.

At the European Union-Russia summit in Paris last month, the two parties agreed to form a group to devise a strategy to raise EU imports of Russian energy over the next 20 years.

Romano Prodi, chairman of the European Commission, suggested a strategic partnership involving the increase of energy imports from Russia in a telephone conversation with President Vladimir Putin at the end of September.

Annual gas exports could rise to 179 billion cubic meters from the current 120 billion cubic meters to 130 billion cubic meters by 2010, Deputy Prime Minister Viktor Khristenko said at the summit.

Gazprom and Shell agreed in June to establish a joint venture to develop the Zapolyarnoye field, in which each will hold a 50 percent stake.

The annual output of the field is expected to be 13 billion cubic meters to 14 billion cubic meters.

Gazprom officials could not be reached for comment Monday.

Shell officials told the government in the fall of 2000 that the company would only invest in Russian projects that have production-sharing agreements, or PSAs.

PSAs enable foreign partners in joint ventures to negotiate tax breaks with federal and regional governments in exchange for a share of the output.

Asked why Shell insisted upon the inclusion of PSAs in its Russian investments, Schub said: "Production-sharing agreements are the only framework that guarantees the stability and predictability of terms for the investor."

Shell was granted a PSA for its participation in the Sakhalin-2 offshore oil project, in which it holds a 62 percent stake, and Schub said Monday he expects one for Zapolyarnoye soon.

By pledging to assist Russia to increase its exports to the EU, Shell is gaining access to Gazprom?s most profitable export market.

"Shell would not agree to sell any of its output [from the Zapolyarnoye field] domestically," said Dmitry Avdeyev, oil and gas analyst at United Financial Group. "Shell will try to obtain 100 percent export rights for its output."

Sergei Yezhov, deputy director of the Independent Fuel and Energy Institute, said that the government?s plans to restructure Gazprom could endanger Shell?s partnership with the gas monopoly.

"In a few years, Gazprom could be divided into separate companies," Yezhov said.

"This is the main problem for a western company ? to predict the future of Gazprom," he said.

In a separate development, Shell is quitting the Vankorsk oil field project in the Krasnoyarsk region, Interfax reported Monday.

Shell has invested $29 million in the field, which was estimated to require $2.4 billion in investment to develop, Interfax said. Shell had a 44 percent stake in the venture in a partnership with the Cyprus-registered Anglo-Siberian Oil Co., Interfax reported.