NOVATEK is ready to enter Sakhalin-2 – Newspaper Kommersant No. 38 (7483) dated 06.03.

According to Kommersant, NOVATEK is ready to acquire 27.5% in the Sakhalin-2 project, which belonged to Shell, which left the Russian Federation. The selection to determine the new owner of this share is delayed due to the fact that the government did not have time to assess the damage caused by the foreign shareholder to the project. NOVATEK asks to expedite the procedure. However, it is not yet clear how NOVATEK will recoup potential investments in Sakhalin-2 and, in particular, whether it will get Shell’s lucrative long-term contract to receive 1 million tons of LNG from Sakhalin-2.

NOVATEK informed the government of its readiness to acquire Shell’s stake in the Sakhalin-2 project (27.5%), Kommersant’s sources familiar with the situation say. At the same time, the gas company is asking the White House to expedite an assessment of the damage caused to the project by Shell in order to take part in the selection of a buyer. In September 2022, the head of NOVATEK, Leonid Mikhelson, said that the company would decide on the advisability of buying a stake after the audit. NOVATEK is actually the only company that meets the criteria published by the Russian government for participation in the selection (see Kommersant dated September 8, 2022). NOVATEK itself did not respond to Kommersant’s request.

As Kommersant reported on December 28, 2022, the government extended the deadline for the selection of a new shareholder of the Sakhalin-2 project due to the fact that it did not have time to assess the damage before the end of the year. On December 30, 2022, Vladimir Putin signed a decree excluding restrictions on the timing of the sale of shares. Profile Deputy Prime Minister Alexander Novak said on February 21 that the assessment would be “worked out in the near future.”

Sakhalin-2, a project to develop the Piltun-Astokhskoye and Lunskoye fields on the Sakhalin shelf, has been implemented since 1994 on the basis of a production sharing agreement. The main shareholders of the project are Gazprom (50%), Japanese Mitsui (12.5%) and Mitsubishi (10%), the rest belonged to Shell. In 2022, the plant produced 11.5 million tons of LNG and 3.7 million tons of oil. About 90% of the plant’s LNG is sold under long-term contracts, mainly to Japan, with spot shipments going to China, South Korea and Indonesia.

In June 2022, Vladimir Putin signed a decree according to which the Russian LLC Sakhalin Energy became the project operator instead of the Bermuda-registered Sakhalin Energy. Foreign shareholders had to apply for a share in the LLC within a month.

Japanese Mitsui and Mitsubishi agreed to a change of jurisdiction and retained their shares in Sakhalin-2. Shell refused to participate in the scheme, writing off the book value of its share in the amount of $1.6 billion. According to the decree of the President of the Russian Federation, the Shell share must be appraised and sold before the end of 2022, after which the money from the sale will have to go to Shell. In this case, in fact, they will be frozen in the Russian Federation on a type C account.

The government has estimated the value of Shell’s stake at 94.8 billion rubles – this amount is close to the assessment of the company itself ($ 1.6 billion), taking into account the ruble exchange rate for the summer of 2022. At the same time, it is not obvious that the entire amount will be transferred to Shell, since the government must carry out an “environmental, technological and other audit” of Shell’s activities in the Russian Federation with a view to causing damage to the project – the amount of damage should be deducted from the funds that Shell can receive for a share .

At the same time, Shell still has an offtake contract to receive up to 1 million tons of LNG per year from Sakhalin-2 until 2028. However, this contract was originally signed with Sakhalin Energy and was not subsequently renegotiated with a new Russian operator, so it has not actually been executed since August. Shell reported on February 2 that it still has two long-term contracts for the supply of LNG from the Russian Federation (another one with NOVATEK’s Yamal LNG for 0.9 million tons per year), but one of them stopped receiving cargo in the third quarter of 2022 of the year.

At the moment, the Sakhalin-2 operator is selling volumes previously supplied under a long-term Shell contract on the spot market. What will happen to these volumes if NOVATEK enters the project is still unknown. As the interlocutors of Kommersant explained, it would be beneficial for NOVATEK to take them into its portfolio, since the prices in this long-term contract are tied to oil and are significantly lower than the spot prices for LNG in Asia at the moment, and the company could receive significant profit.

However, other shareholders of the project, including Gazprom, may be interested in Shell’s volumes returning to the general pool of the project and still being sold on the spot market, distributing profits among all participants in Sakhalin-2.

Sergei Kondratiev from the Institute of Energy and Finance believes that Shell’s long-term contract will most likely not return to the general pool of the project and will go to NOVATEK. However, the expert clarifies, significant legal risks are formed by the position of Shell, which announces plans to protect its rights to participate in the project and existing contractual obligations.

Tatyana Dyatel, Dmitry Kozlov