Shell sees Sakhalin-2 deal with Gazprom this week

MOSCOW, Dec 17 (Reuters) Oil major Royal Dutch Shell is on the brink of a deal to bring Russian gas monopoly Gazprom into the billion Sakhalin-2 project, a spokesman said on Sunday.

''If progress continues to be made, we would expect talks to conclude by the end of this week,'' said Shell spokesman Alf D'Souza. He declined to give further details but described the talks as constructive.

Industry sources told Reuters last week that Shell has offered to cede control of the Sakhalin-2 project, the world's largest liquefied natural gas (LNG) project.

It is also Russia's biggest single foreign investment, and the only big project with no Russian ownership -- something that analysts say has irked the Kremlin, which has increased its control over the energy sector in the last three years.

Shell, as operator of the project, has a 55-percent stake, while Japanese partners Mitsui&Co and Mitsubishi have stakes of 25 percent and 20 percent.

Shell CEO Jeroen van der Veer met Gazprom CEO Alexei Miller and Russian Energy Minister Viktor Khristenko last week.

A Gazprom spokesman declined to comment on the state of the talks when contacted by Reuters on Sunday.

Van der Veer flew back to the Netherlands after the talks on Friday, his second meeting with Miller in a week, and several sources familiar with the matter said both sides were keen to clinch agreement on terms for Gazprom's entry into the project.

One source said they might agree a ''road-map'' towards a deal. Russia's energy ministry said in a statement that Khristenko would meet with Sakhalin-2's shareholders at the end of next week. It gave no further details.

Shell is facing pressure from several sides -- the Kremlin, Gazprom and Russian officials who have threatened the project with administrative sanctions and licence withdrawals.

Shell's D'Souza said last week that ''no single element can be agreed in isolation from the whole'', implying that Shell and its Japanese partners want to resolve all the issues at once.

They have infuriated the Kremlin by doubling costs for the project to billion last year. Under Sakhalin-2's production sharing agreement, that means the state will have to wait longer for royalties and will get less money overall.

The cost overrun derailed a preliminary agreement with Gazprom, which may now get control of Sakhalin-2 instead of the original plan for 25 percent.

The talks now hinge on agreeing the value of the venture, itself contingent on Shell winning the Kremlin's approval for the increased budget, and on agreeing terms for the asset swap with which Gazprom will buy its way in.

Getting a major stake in Sakhalin-2 would be a victory for Gazprom's Miller and the Kremlin, since it would cement the state's control over the sector while giving Gazprom its first stake in a liquefied natural gas (LNG) project.

Gazprom has long said it wants to get into LNG, a supercooled fuel requiring technology that the huge Russian monopoly does not have. Unlike pipeline gas, LNG can be shipped around the world, which would give Gazprom a global market.

Its entry into Sakhalin-2 would also give it a big presence on the Pacific island of Sakhalin, Russia's Far East energy hub which is dominated by state oil firm Rosneft, the only company to successfully challenge Gazprom in the past two years.

REUTERS SBA KP2122