Novatek Eyes Sakhalin-2 Stake as Kremlin Agrees Scheme To Pay Shell $1.21 Billion
The Kremlin’s agreement to settle payment enables the equity transfer to be finalized.
Russia’s largest independent gas producer, Novatek, is poised to acquire Shell’s 27.5% stake in the Far East Sakhalin-2 gas and LNG project after the Kremlin greenlighted a scheme enabling Novatek to legally transfer the $1.21-billion purchase price to the supermajor.
Novatek applied to the Russian government on 3 April to acquire Shell’s unallocated shares in Sakhalin Energy LLC, the project operator. The next day, President Vladimir Putin consented to a process allowing Novatek to legally transfer the $1.21 billion (94.8 billion rubles) agreed by all sides to Shell from Novatek’s foreign currency account, as reported by Russia’s Kommersant business daily, citing sources familiar with the matter.
Leonid Mikhelson, Novatek’s CEO and chairman, suggested the payment scheme to which Putin later agreed, Kommersant wrote. Making the payment to settle the purchase requires Kremlin approval because under a presidential decree of 30 June 2022, Shell can only receive money transfers to a type “C” account in Russia, where the funds will remain blocked.
In June, Putin signed a decree transferring all rights and obligations of the former operator of the Sakhalin-2 project, Bermuda-registered Sakhalin Energy Investment Company Ltd., to a specially created Russian limited liability company, Sakhalin Energy LLC.
Gazprom became the owner of the controlling stake in the new company. Earlier, Gazprom had owned 50% plus 1 share in Sakhalin-2; Shell (27.5% minus 1 share); Japan’s Mitsui and Mitsubishi (12.5 and 10%, respectively). Both Japanese companies agreed to keep their shares under the new terms in the decree. Shell exited the project, booking a $1.6-billion impairment related to its withdrawal from Russia in 2022.
Bidding Requirements Not Even Gazprom Could Satisfy
Though to date no company besides Novatek stepped forward to purchase Shell’s stake, no company other than Novatek could have met the government’s requirements to enter the bidding process—not even Gazprom. To apply, a bidder would need at minimum to be operating an LNG plant with a capacity of 4 mtpa at least, have long-term agreements to charter a fleet of LNG carriers with a 4-million-m3 minimum capacity, and hold long-term LNG sales agreements with international buyers.
Reuters reported in February that one of those sales agreements is ironically with Shell—the world’s largest LNG trader—which continues to take LNG cargos from Novatek under a 20-year contract agreed in 2015 to supply some 900,000 tpa from its Yamal LNG plant in West Siberia’s Arctic north.
Kommersant reported that Russian authorities’ intent to audit Sakhalin-2 could result in a reduction in the purchase value of Shell’s stake. But Novatek has said that any problems identified in the audit could be covered by dividends due to Shell but not yet received from participation in Sakhalin-2 during 2021.
As a result, Shell would be able to receive not only $1.21 billion (94.8 billion rubles) for its share, but also a part in undistributed dividends for 2021 ($1 billion according to Shell’s estimate), minus whatever amount an audit might designate as "shortcomings", Kommersant wrote.
In 2022, Sakhalin Energy exceeded its targets, producing about 11.5 million tons of LNG and 3.7 million tons of Sakhalin Blend oil. Major LNG markets included Japan, China, and South Korea, while oil was mainly sold to China, South Korea, and Japan, according to the company’s website.
In March Shell announced its Shell Salym Development B.V. subsidiary had completed the withdrawal from its 50% interest in the Salym project in West Siberia, which it had developed jointly with Gazprom subsidiary, Gazprom Neft, after having received all necessary regulatory approvals.