Questions On How Shell's Sale Of Sakhalin Hits Its Reserve Replacement Plans - Rigzone

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It is understood that Shell's stake in Sakhalin II would decline to 25% from 55% while its two Japanese partners, Mitsui & Co. and Mitsubishi Corp, would both reduce their stakes to 15 % and 10% respectively, with Gazprom acquiring effective control of the venture.

Given the importance Sakhalin II has in Shell's reserve replacement strategy, any significant loss of future production volumes and reserves under a renegotiated production sharing agreement could be detrimental to Shell's efforts to catch up with its peers in respect of reserve replacement and reserve life, an important parameter to evaluate an oil major's long-term growth prospects. Sakhalin II is Shell's fourth largest development project out of nine, both in terms of reserves (1.398 billion barrels of oil equivalent) and net present value (USD4.85bn). When the project is completed, it is expected to have 9.6 million tonnes per year of LNG capacity.

While Shell does not disclose financial and operational details on Sakhalin II, but only on Russia, CIS and the Middle East, a review of Shell's recent operating metrics reveals that this region is key for Shell's future reserve and production growth. The region accounts for the largest part of Shell's upstream capital expenditure and future net cash flows in line with SEC-disclosure rules. Fitch notes that during 2003-2005 about 50% of consolidated organic reserve replacement originated from this project alone and after prospective production start-up in summer 2008, forecast production volume should total some 430mboe/d, including 1.5 billion cubic feet for natural gas, and represents approximately 7% of Shell's 2005 production on an adjusted basis.

As for Gazprom, gaining a stake in the project will further enhance the company's business profile by providing it with an opportunity to participate in an LNG project and to gain much-needed experience in this cutting-edge industry. Additionally, the participation of Gazprom should help ease what has to date been considerable negative political pressure on the project's development.

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http://www.rigzone.com/news/article.asp?a_id=39311