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. Last Updated: 07/27/2016

Shell Shelves $1Bln Gazprom Deal

Royal Dutch/Shell has quietly shelved its plans to acquire up to $1 billion worth of gas monopoly Gazprom's convertible bonds due to market uncertainties, industry sources said.

Shell had announced it was considering making the purchase in 1997 after it sealed a strategic alliance with the Russian gas giant. To complete the sale, Gazprom in 1998 said it would issue convertible bonds worth $2 billion, half of which were intended for Shell.

However, the securities public offering never took place following Russia's financial collapse in August 1998. World oil prices also sank last year to lows of around $10 a barrel.

Investment firm Horizon, which has friendly ties with Gazprom, said Friday that the gas company is unlikely to issue bonds this year as well.

"But in perspective, Shell may be still interested," said Horizon analyst Maxim Oyrakh.

Gazprom has been holding ongoing talks for about two years with Shell over a bonds purchase of $800 million to $1 billion, said Gazprom finance director Alexander Semenyaka at its annual shareholders meeting in June, according to Petroleum Argus.

But Gazprom chief executive Rem Vyakhirev has conceded that Shell is now stalling over the purchase.

"We are not asking and not pushing Royal Dutch/Shell," he was quoted by Reuters as saying. "Let them sort it out. They have different schemes now."

Troika Dialog oil analyst Ivan Mazalov agreed with Vyakhirev's assessment of the situation.

"Shell has different priorities now," he said. "Their plans have changed due to the previous low world oil prices and continuous crisis in Russia."

The setback with Shell, however, has not stopped Gazprom from searching for foreign investments. The company has won a government resolution to offer nonresidents a 7.02 percent stake worth $2.5 billion to $3 billion, according to industry analysts.

The shares will be sold at levels comparable to ADR prices and some of them will be publicly offered in convertible bonds. Shell had been viewed as the most potential buyer of the future securities.

Shell and Gazprom are also still in talks over the creation of a joint venture to explore the Zapolyarnoye field which harbors about 3.3 trillion cubic meters of gas in the Yamalo-Nenets autonomous region. The partners recently finished a feasibility study for developing the field, said Gazprom deputy chief executive Pyotr Rodionov. Crude lies 3,000 meters under the surface at the Neokomian formation of Zapolyarnoye gas field.

But the companies still have to form a joint venture, which is likely to be called Razvitie, to handle the $1 billion project, according to Gazprom.

Gazprom has refused to sign the joint venture formation agreement until Shell buys the convertible bonds, according to Energy Intelligence Group. But as the Russian side has never issued the papers, the sides are likely trying to negotiate a way around their disagreements in order to launch the exploration project.

Shell officials could not be reached for comment Friday.

Gazprom needs funds to finance its participation in the Zapolyarnoye development and a bonds placement was seen as the solution to the problem. Shell and Gazprom would then equally split the project costs.

While the northern Zapolyarnoye project seems to be on hold, both Shell and Gazprom are racing forward with deals in the south. Gazprom is pressing on with its Blue Stream project to deliver gas to Turkey, via a pipeline under the Black Sea, while Shell has just secured a 50 percent share in the Trans-Caspian gas pipeline, which will stretch from Turkmenistan to Turkey.

Meanwhile, Gazprom may see a top management reshuffle Aug. 26 when it holds an extraordinary shareholders meeting to elect a new board of directors.