The Russian government, through the Natural Resources Ministry, has orchestrated an investigation into Sakhalin Energy, the operator of the Sakhalin-2 natural gas and oil project in the Russian Far East. Following talks Dec. 8 between the head of Russian state-controlled energy giant Gazprom and Jeroen van der Veer, head of Royal Dutch/Shell (the majority stakeholder in Sakhalin-2), it appears that Gazprom is poised to gain a controlling stake in the project. Gazprom monopolizes natural gas exports from the country and has near total control of production. Foreign control of the Sakhalin-2 project, achieved due to a 1990s-era production sharing agreement, has not only (in Russia's mind) robbed Gazprom of an asset, but it has also impeded the Kremlin's policy of imposing maximum control over the strategic energy sector. Under sustained pressure, Royal Dutch/Shell agreed to a deal in July 2005 that would allow Gazprom a blocking stake in Sakhalin-2 and give the Anglo-Dutch company a 50 percent share in the Zapolyarnoye field, a potentially productive asset connected to Russia's export infrastructure. However, cost overruns at Sakhalin-2 have caused Gazprom to reconsider the deal, and the energy giant has since adopted a much more aggressive policy. After the Russian government's maneuvers to suspend licenses, press criminal charges and otherwise pressure Sakhalin Energy, Royal Dutch/Shell is looking like it will give up a 30 percent stake in Sakhalin-2 (of its original 55 percent), and the other shareholders — Japanese firms Mitsubishi and Mitsui — might give up as much as 10 percent each. The details of the final deal, which could be completed as soon as the first quarter of 2007, might never be made public; Royal Dutch/Shell is likely to be embarrassed by the terms, which will definitely not favor the company. The slightly better outcome for the Anglo-Dutch company would be an asset swap, along the lines of the one previously negotiated with Gazprom. Even if Royal Dutch/Shell never produces a barrel of crude from the deposits it receives in exchange for its stake in Sakhalin-2, the company will be able to retain a decent level of reserves — a concern that has caused much grief for the firm's board of directors. However, it is possible that Gazprom would rather offer cash. Gazprom might not have to pay anything if the judges of the pending court proceedings rule that Royal Dutch/Shell should pay for the environmental damage done by the project; however, it is the loss of reserves that would deal a significant blow to the Anglo-Dutch company. If this happens, Royal Dutch/Shell might even pull out of the project, essentially killing it. Although there are other parties involved, the Anglo-Dutch company is the biggest investor and the biggest contributor of technology and skill. The project's Japanese partners would want to remain involved as long as there were guarantees that they would receive their allotted energy supplies, but it is questionable whether Mitsubishi and Mitsui would have the technology or the funds to operate the project without Royal Dutch/Shell. Without the bulk of the project's capability and financing, Gazprom ostensibly lacks the capacity to continue, and could abandon the project altogether. Regardless of the final shape of the settlement, the fate of the Sakhalin-2 project has been determined. Under Gazprom's control, Russia's first liquefied natural gas production and export facility is unlikely to begin operations on schedule, if at all. The only remaining variable for Royal Dutch/Shell is just how bad the final terms of giving up control will be.