Shell cuts through to the exit – Newspaper Kommersant No. 57 (7502) dated 04/04/2023
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According to Kommersant, NOVATEK received Vladimir Putin’s consent for Shell to receive the entire amount of 94.8 billion rubles. for her share in the Sakhalin-2 project and was able to withdraw this money from Russia. NOVATEK is going to buy a share of Shell and has already submitted an application to the government. The Russian authorities were going to audit Sakhalin-2, suspecting Shell of causing damage to the project and planning to reduce the amount of the payment by the amount of damage. But, according to NOVATEK, the identified shortcomings can be covered by the dividends due to Shell from participation in Sakhalin-2 for 2021, which she did not receive in full.
The head of NOVATEK, Leonid Mikhelson, proposed to Russian President Vladimir Putin to allow the transfer of funds that Shell could receive from the sale of 27.5% in the Sakhalin-2 project to its foreign account. Now, based on the presidential decree of June 30, 2022, Shell can only receive money to a type “C” account in Russia, where it will remain blocked. NOVATEK is going to buy a share of Shell: March 6 “Kommersant” wrotethat the company has applied to the government.
As Kommersant was told by sources familiar with the appeal of the head of NOVATEK, the request to allow Shell to receive money is designed to “minimize the risks for operating activities and export supplies of hydrocarbons from the project.” Vladimir Putin, according to them, put the visa “I agree” on the letter. NOVATEK did not respond to Kommersant, Gazprom declined to comment.
Sakhalin-2 is a project to develop the Piltun-Astokhskoye and Lunskoye fields on the Sakhalin shelf, implemented since 1994 under a production sharing agreement. Initially, the shareholders of the project were Gazprom (50%), Japanese Mitsui (12.5%) and Mitsubishi (10%), as well as Shell (27.5%). Net profit of Sakhalin Energy (project operator) under IFRS in 2022 amounted to $4 billion, revenue – $9.6 billion.
In the summer of 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. Mitsui and Mitsubishi agreed to the change of jurisdiction and retained their shares. Shell refused to participate in the scheme, writing off the book value of its $1.6 billion stake.
By presidential decree, the government must sell Shell’s stake and transfer the money to the account type “C”. However, the amount of damage that Shell allegedly caused to the project must be deducted from this amount. The government has valued Shell’s stake in Sakhalin-2 at 94.8 billion rubles. (this is comparable to Shell’s own estimate).
According to Kommersant, NOVATEK believes that the shortcomings identified as a result of the audit of the project “can be eliminated in the normal course of business” of Sakhalin-2. To eliminate them, according to NOVATEK, dividends from Sakhalin-2 for 2021, which were not paid in full, attributable to Shell can be used. In April 2022, Shell announced that it had received $165 million in dividends for 2021 from Sakhalin-2. Shell later estimated the total unpaid dividend from Sakhalin Energy at $1 billion.
The approval of Novatek’s proposals by the President of the Russian Federation means that Shell will be able to receive all the funds for its share (94.8 billion rubles), as well as, possibly, part of the undistributed dividends for 2021, minus the costs of covering the identified “deficiencies”.
The Ministry of Finance did not respond to Kommersant’s request regarding the decision to pay Shell funds and the timing of the audit.
The fact that funds are transferred does not automatically mean that they will be received by Shell, Nikolay Titov, atLegal’s lawyer, notes. In case of disagreement with such a payment, Shell can transfer the money to a special deposit, where they will remain until their future fate is determined. “In addition, receiving dividends is not tantamount to waiving claims related to the sale of a share in the business. Therefore, the risks of litigation abroad at the initiative of Shell are still significant,” he said.
Also, the fact that Shell will be paid the cost of its stake in Sakhalin Energy cannot unequivocally indicate the impossibility of making claims on the project’s net profit for 2021, Alexey Sharov, managing partner of Averta Group, agrees. “After all, in 2021 Shell was still a full-fledged investor in Sakhalin-2, there were also no restrictive measures from the Russian Federation. Last year, the company issued a statement in which it indicated that it would continue to consider itself a shareholder of Sakhalin Energy,” he explains, considering Shell’s claims to the Russian Federation and the companies involved in the project “quite possible.”
On the other hand, the lawyer clarifies, one cannot rule out the achievement by Russia and Shell of agreements in principle on the termination of all further disputes in connection with the payment to the company of the cost of its share in Sakhalin-2.
Mr. Sharov notes that if Shell nevertheless decides to file claims, the company will face the question of the jurisdiction of the dispute.
The Sakhalin-2 Production Sharing Agreement provides for the consideration of disputes in the Stockholm Arbitration. Meanwhile, by decree of the President of the Russian Federation of June 30, 2022, the exclusive jurisdiction of all disputes was established by the Moscow Arbitration Court.
According to the lawyer, Shell “is unlikely to agree to this”, and the dispute over competence “may become an additional factor in delaying the potential process, which should motivate the parties not to bring the situation to court.”
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