Both companies confirmed that Jeroen van der Veer, Shell's chief executive, had met Alexei Miller, head of Gazprom, in Moscow on Friday, but declined to go into detail on their talks.

"I can confirm that Shell Chief Executive Jeroen van der Veer met Gazprom head Alexei Miller and Energy Minister Viktor Khristenko in Moscow on Friday to discuss Sakhalin-2-related issues," a Shell spokesman said on Monday.

"The discussions were positive but their contents remain confidential."

The tentative understanding comes after months of pressure from Russia's natural resources ministry and its environmental regulator, which have accused Shell of environmental violations.

The world's biggest gas producer Gazprom has long coveted a share of the vast oil and gas project on the Pacific island of Sakhalin that will supply Asia's growing energy markets.

Government pressure

Gazprom won powerful backing from the Kremlin, angered at cost overruns that meant Russia must wait longer to see a profit.

Analysts sensed the Kremlin at work when environment officials began pursuing Shell for alleged violations ranging from unauthorised tree felling to misuse of water permits.

Sergei Kupriyanov, Gazprom's chief spokesman, said: "Shell did indeed make several proposals concerning Sakhalin-2 at a meeting on Friday.

"Gazprom has yet to decide on Shell's proposals because the project's problems, including ecological problems, remain in place."

The energy ministry declined comment before giving a briefing by Khristenko on Tuesday.

"Gazprom has yet to decide on Shell's proposals because the project's problems, including ecological problems, remain in place"

Sergei Kupriyanov, chief spokesman for Gazprom

With Shell willing to surrender Sakhalin-2 to a Kremlin determined to wrest more control over Russia's energy riches, the local partners in Anglo-Russian venture TNK-BP may now come under the spotlight.

Industry insiders say a deal for Gazprom or state-controlled Rosneft, both chaired by high state officials, to buy into TNK-BP is likely before the December 2007 general election.

"If you look at sectors that the government regards as strategic - oil, gas, metals, maybe the media - make sure you sign up with someone who has a long-term relationship with the government," said Stephen O'Sullivan at Deutsche UFG in Moscow.

Analysts suspect the official campaign against Shell was designed to secure better terms for Russia, which has no equity stake in Sakhalin-2 under a production-sharing agreement struck in the early 1990s when oil prices were much lower.

Work on Sakhalin-2, which will supply an LNG-processing facility with a capacity of 9.6 million tonnes per year, is mostly complete but threats of licence withdrawals, fines and litigation are disrupting progress.

Industry watchers say the crackdown on Shell by Oleg Mitvol, deputy head of environmental agency RosPrirodNadzor, may come to an abrupt end if Gazprom does secure control of Sakhalin-2.

But Mitvol signalled no early climbdown: "If they agreed that is fine with me, but the same environmental laws apply to everyone.

"Sakhalin Energy will have to pay fines for ecological damage, whoever its shareholders are."

Assets plus cash

A doubling of estimated costs at Sakhalin derailed an earlier deal under which Shell would have swapped a one-quarter stake in Sakhalin for an interest in Gazprom's Zapolyarnoye gas field, located north of the Arctic Circle in West Siberia.

Now, sources familiar with the matter say, Gazprom will swap field assets and may make a cash payment for a controlling stake of over 50 per cent in Sakhalin-2, currently operated by Shell.

Asked whether a cash payment would be added to the asset swap involving Zapolyarnoye, one industry source said: "That was the original deal, but deals change."

Shell's partners Japan's Mitsui & Co and Mitsubishi would reduce their stakes of 25 and 20 per cent respectively, by 10 per cent each, enabling Gazprom to secure control, another source has said.

A Mitsui spokesman said: "We are closely watching the ongoing talks between Shell and Gazprom. We'll decide on our stake in the project after the bilateral talks are concluded."

Mitsubishi was not aware of the content of the Shell-Gazprom talks, but said it had no plans to exit the project entirely.

Under the proposal, the project will continue to operate on the basis of a production-sharing agreement, an arrangement whereby project costs are first defrayed before revenues accrue to the Russian state.

"The PSA stands," the industry source said.