RUSSIAN ENERGY: AMBASSADOR MEETS WITH SHELL ON

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...
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.

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
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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?
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.

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
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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 Medvedev'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