Russia tempts supermajor Shell with $1.3 billion Sakhalin 2 carrot

Russian authorities are trying to gauge whether UK supermajor Shell will agree to the $1.3 billion sale of its former stake in the Sakhalin 2 oil and gas development, as the government looks to minimise risk for the project’s future operations and exports.

Russia’s leading independent gas producer Novatek has said it will submit a bid to buy the 27.5% stake in Sakhalin 2 held by Shell before the Russian government expropriated the project’s assets last year — and has reportedly received assurance that the funds will be transferred to the supermajor instead of remaining frozen in Russia.

The Sakhalin 2 project in Russia’s far east was the country’s first liquefied natural gas project and a key supplier to Japan, South Korea and China, producing about 11 million tonnes per annum of LNG.

Shell held a 27.5% stake in Sakhalin 2 operator Sakhalin Energy Investment before it was disbanded by the government and had its assets transferred to a new operator, Sakhalinskaya Energia last August following the supermajor’s decision to exit Russia in response to the invasion of Ukraine earlier the same year.

Other foreign companies involved in Sakhalin Energy Investment — Japan’s Mitsui and Mitsubishi — agreed to the Russian government’s offer to take a stake in the new operator that matched their previous shareholding.

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However, Shell refused the government offer — leaving the government holding the supermajor’s interest — and has repeatedly argued that it continues to reserve “all of its legal rights relating to… the Sakhalin 2 assets” and its interest in Sakhalin Energy Investment.

The government resolved to auction the stake, but with the proceeds being held in a special bank account in Russia rather than being sent to Shell’s accounts in the West.

On Monday, Novatek informed select Russian state-controlled media that it has resolved to submit a bid to the government to negotiate a purchase of the shareholding formerly held by Shell.

Following Novatek’s announcement, Moscow business newspaper Kommersant on Tuesday reported that the government has agreed to waive the restriction preventing the auction payment being sent to Shell outside the country.

According to Kommersant, Novatek executive chairman Leonid Mikhelson received a written resolution from Russian President Vladimir Putin that the 94.8 billion rubles ($1.3 billion) offered by Novatek for the Sakhalin 2 stake will be transferred to Shell instead of remaining frozen in Russia.

Mikhelson had appealed to Putin that sending the payment to Shell would minimise risks for the project’s future operations and exports, Kommersant reported.

Novatek has not replied to Upstream’s request for comment by the time of publishing.

Mikhail Krutikhin, a managing partner in Moscow-based energy consultancy RusEnergy, suggested that Shell may agree to receiving the payment as it would settle the Sakhalin 2 case and reduce the financial losses incurred from its Russian exit.

However, Krutikhin added that the Kremlin may pressure Shell to accept the payment offer, or face the possibility of the funds being used to pay for “damages” to Sakhalin 2 that Russian authorities claim were caused by Shell’s exit.

New Sakhalin 2 operator Sakhalinskaya Energi revealed in its latest sustainability report that the project’s revenues increased by 67% to $9.6 billion in 2022, while net profit doubled to $4 billion against 2021.

A spokesperson for Shell in London said the supermajor cannot comment or speculate on the outcome of Novatek’s bid.

However, sources familiar with Shell’s legal position on the issue suggested there was no immediate change in the company’s position regarding the Russian government’s actions over its Sakhalin 2 shareholding.