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. Last Updated: 07/27/2016

Shell to Cash In Half Stake, Stay Operator

Shell is due to sell half of its 55 percent stake in Sakhalin-2 to Gazprom for cash, a source close to the talks said Wednesday, in an imminent deal that looks likely to be a significant setback to the oil major.

The project's three shareholders will each give up one-half of their holdings to hand Gazprom a controlling stake, the source said, citing part of the proposed deal finalized last week.

Project operator Shell would then have a stake of 27.5 percent, while Mitsui would reduce its stake to 12.5 percent from 25 percent and Mitsubishi to 10 percent from 20 percent. Gazprom would need just 50 percent plus one share to take control.

Shell has long been angling for an asset swap with Gazprom, and would be dealt a harsh blow if forced to settle for cash only, analysts said.

But the deal would not give Shell any guarantee that it would be invited to develop future projects with Gazprom, the source said.

"There is a consideration of future cooperation," the source said. "It is an expression of goodwill.

"I wouldn't say it was a promise," the source said, adding that any talk of future cooperation in the deal would be nonbinding.

Deputy Industry and Energy Minister Andrei Dementyev on Wednesday confirmed that gazprom would pay for its stake in cash.

Under the proposed deal, Shell would remain the project operator, even though its controlling stake would be heavily reduced, the source said. Sakhalin-2 is the world's largest liquefied natural gas, or LNG, project. Gazprom has no experience producing LNG.

The state-run gas giant has also said it would develop Shtokman on its own. The huge Arctic gas field is also due to produce LNG, and Shell has said it would be interested in participating.

The source said the information came from a document finalized last week that is part of the deal. Talks between Shell and Gazprom have stalled over varying valuations of Sakhalin-2.

Both Shell and Gazprom have said they hoped to conclude the deal this week. Reuters reported late Wednesday that Shell CEO Jeroen van der Veer would fly to Moscow on Thursday, but company spokesman Maxim Shub would not confirm this.

Gazprom spokesman Sergei Kupriyanov declined to comment and said he was unaware of any scheduled meeting between Gazprom CEO Alexei Miller and Van der Veer.

Van der Veer is due this week to visit Moscow for a third time in as many weeks.

"Shell would be most unhappy to take cash and reduce its asset base in Russia," said Chris Weafer, chief strategist at Alfa Bank.

Shell, riding high on $50-plus oil prices, is still recovering from a 2004 scandal, when it admitted it had overestimated its reserves. Sakhalin-2 is a flagship project for the company, with its other major projects in unstable Nigeria.