06MOSCOW13022, RUSSIA ENERGY: GAZPROM SET TO ACQUIRE CONTROLLING

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Reference ID Created Released Classification Origin
06MOSCOW13022 2006-12-21 14:22 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO1394
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #3022 3551422
ZNY CCCCC ZZH
O 211422Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6002
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 4141
RUEHUL/AMEMBASSY SEOUL PRIORITY 2636
RUEHKO/AMEMBASSY TOKYO PRIORITY 4076
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 MOSCOW 013022 
 
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 4321/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM AND MCKIBBON 
 
E.O. 12958: DECL: 12/21/2016 
TAGS: ECON ENRG EPET PREL RS
SUBJECT: RUSSIA ENERGY: GAZPROM SET TO ACQUIRE CONTROLLING 
STAKE IN SAKHALIN-2 
 
REF: MOSCOW 12930 
 
Classified By: Econ M/C Pamela Quanrud.  Reasons 1.4 (b) and (d). 
 
1. (C) Summary.  The British Economic M/C in Moscow confirmed 
December 20 his understanding that agreement is likely by the 
end of this week between Sakhalin Energy's partners and 
Gazprom on the terms of Gazprom's cash acquisition of a 
controlling stake in Sakhalin-2.  Agreement would bring to a 
close negotiations complicated by Sakhalin Energy's 
announcement last summer of significant cost overruns, and 
capped by recent GOR threats of huge environmental damage 
claims.  While the final price Gazprom will pay is unknown, 
and will likely be on the low side of Shell's target range, 
it must in the end be a price Shell shareholders can live 
with.  End summary. 
 
2. (C) British Economic M/C in Moscow confirmed December 20 
that Sakhalin Energy and Gazprom are poised to announce a 
deal, perhaps still this week, giving Gazprom a controlling 
50 percent stake in Russia's first liquefied natural gas 
(LNG) project.  According to the press, Gazprom will acquire 
one half of each current partner's stake -- 27.5  percent 
from Shell, 12.5 percent from Mitsui, and 10 percent from 
Mitsubishi -- in exchange for cash payments.  While the price 
is unknown, it will certainly be higher than the $2.6 billion 
offered by Gazprom and rejected out of hand by Sakhalin 
Energy last week (ref).  Authorities publicly confirmed 
December 20 that the pending deal would not involve any of 
the asset swaps that had been at the heart of the previous 
Gazprom/Sakhalin Energy deal scuttled by Gazprom in summer 
2005 after Sakhalin Energy's announcement of significant cost 
overruns.  All indications are that Shell will retain 
operational control over the project. 
 
3. (C) Comment: Shell undoubtedly obtained a price it can 
present to shareholders with a straight face.  Still, the 
final amount will probably be in the lower range of Shell's 
target price, reflecting a position weakened by Kremlin ire 
over project cost overruns and threatened environmental 
claims assessed by the Natural Resources Ministry at $10 
billion.  Loss of shares will negatively impact Shell more 
than its Japanese partners.  While the Japanese are mainly 
concerned with securing energy supplies, the loss of Shell's 
Sakhalin reserves will affect the company's long-term value, 
particularly on top of recent revelations of inflated reserve 
estimates.  Our British interlocutor's request that third 
parties embrace the final deal represents an attempt to shine 
the best light on a forced hand.  End comment. 
RUSSELL

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