Investors weren't quite sure what to make of yesterday's news involving Russia's Gazprom and partner Royal Dutch
On hearing the news, investors sold off the shares of both Royal Dutch and Shell by about 1% apiece. In contrast, Gazprom's shares, which trade over the counter, were bid up more than 4%. The negative, though muted, reaction to the news on the part of investors in the foreign oil companies is understandable. After all, Sakhalin-2 has progressed nicely since beginning production in 1999. It's a proven find, the world's largest liquefied natural gas (LNG) project, and likely to turn into an all-around winner for its participants (which in addition to the companies named include nearby Japan's Mitsubishi and Mitsui
There are a few factors, however, that suggest the deal is actually good for Royal Dutch/Shell. First and foremost, of course, is the political reality: It's better for a foreign investor to stay on the good side of the Russian government. Even if you're within your rights in turning down a "deal," being greedy about hanging on to too good of a thing can get you YUKOSed if you're not careful.
Second, even if the two projects are not exactly comparable, Gazprom will be paying Royal Dutch/Shell the difference in value between the sold stake in Sakhalin-2 and Royal Dutch's new interest in Lower Zapo.
Third, it's worth remembering that, while Sakhalin-2 is believed to hold 4 billion barrels of oil equivalent, Royal Dutch/Shell had claim to just a 55% interest in that -- 2.2 billion barrels. After selling a 25% interest in Sakhalin-2 to Gazprom, Royal Dutch/Shell will still have an interest in about 1.2 billion barrels there; by gaining a 50% in interest in Lower Zapo, believed to contain 3 billion barrels, it gets access to 1.5 billion more. Net result: a gain of about 500 million barrels to Royal Dutch/Shell's recently drained reserves.
Final point: Note the percentages. Once the deal is final, Royal Dutch/Shell will continue to hold a nearly 30% interest in Sakhalin-2 and acquire a 50% interest in Lower Zapo. Each of those stakes is a "blocking stake," enabling Royal Dutch/Shell to prevent most of the nastier tricks that can be played on a foreign investor under Russian corporate law (share dilution, restructurings, asset stripping, and the like). Given the harsh (business) environment prevailing in Siberia, Royal Dutch/Shell can use all the protection it can get.
Fool contributor Rich Smith owns no shares in any of the companies mentioned above.
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