06MOSCOW12930, RUSSIAN ENERGY: AMBASSADOR MEETS WITH SHELL ON

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Reference ID Created Released Classification Origin
06MOSCOW12930 2006-12-14 14:39 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO5254
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #2930/01 3481439
ZNY CCCCC ZZH
O 141439Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5854
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 4136
RUEHUL/AMEMBASSY SEOUL PRIORITY 2634
RUEHKO/AMEMBASSY TOKYO PRIORITY 4074
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 012930 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA 
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT/EKIMOFF/PISCITELLI 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 12/14/2016 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: AMBASSADOR MEETS WITH SHELL ON 
SAKHALIN-2 
 
 
Classified By: DCM Daniel A. Russell.  Reasons 1.4 (b/d). 
 
1. (C) SUMMARY.  On December 14, the Ambassador met with 
Chris Finlayson (U.K. citizen), head of Shell's Russia 
operations, and Alf D'Souza (Australian citizen), Shell's VP 
for corporate affairs, to discuss the latest developments on 
the Sakhalin-2 project.  Finlayson characterized negotiations 
with Gazprom as having progressed well until very recently. 
On December 13, Gazprom came in with an unacceptably low 
offer of $2.6 billion for a 50 percent stake in the project. 
The figure is lower than previous offers because Gazprom is 
factoring in the costs from the environmental damage from the 
project reportedly found by the GOR.  The CEOs from Sakhalin 
Energy's three shareholders will meet with senior Russian 
officials on December 15 but, in the event these meetings are 
unsuccessful, the consortium appears to be examining all 
options, including arbitration.  END SUMMARY 
. 
TWO DAYS AGO... 
--------------- 
. 
2. (C) Finlayson said that up until December 13 the 
negotiations regarding Gazprom's entry into Sakhalin-2 
project had been progressing well (Note: Sakhalin-2 is being 
developed by Sakhalin Energy (SE), made up of Shell and the 
Japanese companies Mitsubishi, and Mitsui.  Shell is the 
operator of the project).  The two sides had reached closure 
on six of the seven principles that they had agreed would 
form the basis of the deal and Shell and its Japanese 
partners had agreed to sell Gazprom a 50 percent stake.  The 
outstanding issue was the value of that stake.  Finlayson 
said that Gazprom and SE were about $2-3 billion apart, an 
amount he viewed as bridgeable.  Gazprom proposed -- and SE 
accepted -- that the final valuation would be based on the 
assumption that Gazprom had entered the project on the ground 
floor. 
. 
...AND YESTERDAY 
---------------- 
. 
3. (C) At a meeting on December 13, Alexander Medvedev, 
Gazprom's Vice Chairman and negotiator on the Sakhalin-2 
project, informed Finlayson that Gazprom's Chairman Alexey 
Miller had examined the file on the environmental accusations 
made against SE by Oleg Mitvol, deputy head of the Ministry 
of Natural Resources' environmental watchdog agency, 
Rosprirodnadzor.  Miller concluded that the environmental 
damages -- $10 billion worth -- should be factored into the 
negotiations.  As a result, Medvedev said that Gazprom was 
willing to offer only $2.6 billion for the 50 percent stake. 
Finlayson said this was a "silly" offer significantly below 
earlier offers and that it was not within his remit to even 
discuss such a low figure.  These comments track with what 
the Ambassador was told by the U.K. Ambassador Anthony 
Brenton (please protect), who said that press coverage of the 
negotiations did not accurately reflect the difficulties the 
two sides were having coming to closure. 
. 
WHAT NOW? 
--------- 
. 
4. (C) Finlayson said that Shell has engaged "high-level 
third party intervention" (but did not say who) to talk to 
the GOR.  In addition, on December 15 the CEOs for Shell, 
Mitsubishi, and Mitsui will come to Moscow to meet with 
Miller and Energy Minister Viktor Khristenko.  If these 
meetings are not fruitful, Finlayson said that the partners 
are preparing other options, including those under various 
bilateral treaties and arbitration as well as altering their 
neutral and even positive media stance about the negotiations 
to a chillier and more negative one.  He said that even if 
they wanted to do what Gazprom is asking of them, they could 
not because senior managers would have to answer to 
shareholders and they worry about this "contagion" spreading 
to other countries in which they do business.  In a separate 
conversation with the Ambassador, Japanese Ambassador to 
Russia Yasuo Saito (please protect) said that there is a good 
chance that the Japanese companies, by contrast with Shell, 
 
MOSCOW 00012930  002 OF 002 
 
 
would cave-in to Gazprom's demands because they are under a 
lot of pressure in Japan to deliver the gas.  Finlayson said 
that there "very likely" will be further production delays as 
a result of these negotiations and the recent removal of 
water use licenses on some stretches of the gas pipeline on 
Sakhalin Island and affecting drilling permits. 
. 
SHELL'S ANALYSIS 
---------------- 
. 
5. (C) Finlayson said that it was hard to tell where this 
issue would go from here and how much of this was negotiating 
bluff on the part of Gazprom.  He said Med
vedev's body 
language indicated that he felt extremely uncomfortable 
relaying this message from Miller.  Further, some on Shell's 
team heard that Miller was not happy with this decision 
either but had been ordered "from above" to launch it. 
Finlayson noted that the $10 billion in environmental fines 
has no basis in Russian law.  By comparison, despite all the 
hoopla in the media recently, the fines from the formal 
charges against SE amounted to $10,000 in administrative, not 
criminal, fines and were primarily centered around the work 
performed by Russian subcontractors. 
BURNS

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