Gazprom structure will buy Shell’s share in the Sakhalin-2 project

Gazprom structure (MOEX: GAZP) will buy out Shell’s share in the Sakhalin-2 project, which NOVATEK had previously intended to acquire. The Russian government approved the transaction at a price of 94.8 billion rubles. The purchase of a stake in Sakhalin-2 has long fallen out of NOVATEK’s focus, as the benefits of the deal for the company became less and less obvious over time. Against this background, according to analysts, Gazprom looked like the only realistic buyer.

The Russian government has agreed to the sale of a 27.5% stake in the Sakhalin-2 project, previously owned by Shell, to the Gazprom structure – Sakhalin Project LLC, it follows from government orders dated March 23. The cost of the package is 94.8 billion rubles.

Gazprom already controls 50% in the project operator Sakhalin Energy LLC, and Japanese Mitsui (12.5%) and Mitsubishi (10%) are also among the shareholders. Sakhalin Project LLC, according to SPARK, was established on July 18, 2023, the owner of 100% is Gazprom Sakhalin Holding LLC.

Initially Shell share planned to buy NOVATEK, the company has already received government permission. Kommersant’s interlocutors name several reasons for the company’s loss of interest in a share in the project: difficult negotiations with Gazprom, which refused to give NOVATEK a sufficient number of management functions, as well as the presence of its own, higher-priority projects for investment. In addition, an important part of the deal was supposed to be the transfer of a take-off contract to Shell for 1 million tons of LNG from Sakhalin-2, but it was not clear how exactly this could be done.

Initially, the government developed criteria for potential buyers of Shell’s share, which only NOVATEK met. But in February the government changed the criteria, significantly easing them.

In the summer of 2022, Vladimir Putin signed a decree according to which the Russian Sakhalin Energy LLC became the operator of the project instead of Sakhalin Energy registered in Bermuda. Foreign shareholders had to submit an application for a share in the LLC within a month. Mitsui and Mitsubishi agreed to a change of jurisdiction, thereby retaining their shares. Shell refused to participate in the scheme, writing off the carrying value of its stake in the amount of $1.6 billion.

By order of the President, the government must sell Shell’s share and transfer the money to a Type C account. The government valued Shell’s stake in Sakhalin-2 at RUB 94.8 billion. However, from this amount must be deducted the amount of damage that Shell allegedly caused to the project.

The decision to purchase a share by Gazprom does not seem unexpected, says independent expert Alexander Sobko. Initially there were few contenders, and after the criteria that the buyer must meet changed in February, the likelihood that it would be Gazprom increased, he concludes.

Find 94 billion rubles. for Gazprom, even in the conditions of current financial difficulties, according to his estimates, there will be no big problems, since this is a purchase at a discount that should quickly pay for itself.

A stake in the company is being sold at a price slightly higher than two annual profits for 2021 (there is no IFRS report for 2023 yet, and 2022 was atypically profitable), recalls Alexander Sobko. “It is still difficult to say how the company will sell new volumes of LNG, but the low purchase price reduces the risks of any sales mechanisms,” says the analyst.

Tatiana Dyatel