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. Last Updated: 07/27/2016

Shell Close to Gazprom Deal

TOKYO -- Gazprom and Royal Dutch/Shell are expected to sign a preliminary deal on Thursday in which Shell will lose a big chunk of one of its most valuable oil and gas projects, industry sources familiar with the talks said.

"They are expected to sign a term sheet on Thursday and continue talks to decide on the details of the deal," one of the sources said.

In June, Gazprom said the companies were discussing a scheme in which Shell would invite Gazprom into its Sakhalin-2 liquefied natural gas project on Sakhalin Island.

In return, Gazprom would give the British-Dutch oil major an interest in its West Siberian Zapolyarnoye field, which produces 100 billion cubic meters of gas per year, according to Gazprom.

Some industry sources said the swap would not be a good deal for Shell, which is struggling to replace its falling reserves, but reflects the Kremlin's increasing desire to keep valuable natural resources in Russian hands.

A Shell spokesman declined to comment, except to say it was in talks with Gazprom about the Russian firm joining Sakhalin-2 and about Shell taking an interest in Zapolyarnoye.

Shell owns 55 percent of Sakhalin-2, the world's largest LNG project. Japanese trading houses Mitsui and Mitsubishi own 25 percent and 20 percent, respectively.

Involvement in Sakhalin-2 would help Gazprom gain much-desired experience in LNG.

LNG is gas supercooled to liquid form so that it can be transported by ships when distances are too long for pipelines to be economical.

LNG is expected to play an increasing role in world energy supply, and Gazprom sees it as a method by which it can monetize more of its huge gas resources.

The industry sources familiar with the Sakhalin-2 talks said the parties might continue to negotiate the exact terms of the deal after the signing of Thursday's preliminary deal.

Other industry sources said Gazprom would probably take about 25 percent of Sakhalin-2 and that Shell would get rights to tap the lower deposits of the Zapolyarnoye field.

Industry players said Gazprom probably needed the technical expertise of an international oil company to extract the lower deposits in the Zapolyarnoye field, suggesting it was getting the better part of the bargain.

"They [Shell] are giving away a stake in a project that is almost on stream for a stake in a project that hasn't even been developed," said one analyst, who noted the deal was one Shell had little choice but to accept.

However, the analyst noted that the transaction could be sweetened by Shell's receiving favorable terms in regard to extracting hydrocarbons from Zapolyarnoye as well as a rebate from Gazprom in return for the capital it has already invested in the Sakhalin-2 project.

Last month, the European Bank for Reconstruction and Development said it had delayed approval of a financing package for Sakhalin-2 due to environmental concerns.

Also in June, Alexander Medvedev, head of Gazprom's export unit, said the company was considering buying Russian state oil firm Rosneft's stakes in the Sakhalin-1 project and may join the Sakhalin-3 project.