Shell set sail from Sakhalin – Kommersant newspaper No. 161 (7362) of 09/02/2022

Anglo-Dutch Shell is expected to leave the Sakhalin-2 gas liquefaction project, having disagreed with the re-registration of the operating company in Russian jurisdiction. Shell noted that it “reserves all its legal rights” as a shareholder of the former operator Sakhalin Energy. Apparently, we are talking about Shell’s potential appeal to the court of the state of New York with a claim for compensation for the cost of its stake in Sakhalin-2, which the company estimated at $1.6 billion, and lost profits. At the same time, lawyers doubt that Russia will comply with the decision of the American court, and the lawsuit itself could drag on for decades.

British Shell, which owns a 27.5% stake in the Sakhalin-2 LNG project, has officially informed the Russian government that it does not intend to be part of the new project operator, Sakhalin Energy LLC. This company was created order government and start work as an operator on 19 August. At the same time, shareholders had to confirm their intention to remain in the project by September 5. At the moment, Gazprom (50% plus one share), as well as Japanese Mitsui (12.5%) and Mitsubishi (10%) have retained their stakes in the operator.

Thus, Shell became the only shareholder who withdrew from the project. Now the company’s stake will be sold by the government of the Russian Federation within four months at a price set by an independent appraiser, who has chosen B1-Consult (formerly the Russian division of EY). Then the amount of the sale will be credited to Shell’s account in the Russian Federation, but only after deducting from it the amount of compensation for “environmental and other” damage that Shell could cause during the implementation of the project (the existence of damage and its amount has yet to be determined by the Russian government).

Shell wrote off the book value of its $1.6 billion stake in Sakhalin-2 in the first quarter. However, the company emphasizes that it “reserves all its legal rights” as a shareholder of Sakhalin Energy.

This probably means that Shell is considering going to court – under the Sakhalin-2 production sharing agreement, concluded in 1994, all disputes are resolved according to the law of the State of New York. In the near future, Shell risks losing the contract with Sakhalin Energy for receiving 1 million tons of LNG per year, as the new Russian operator asks counterparties to confirm previous agreements (see “Kommersant” dated August 25).

Dmitry Gorbunov, a partner at the Rustam Kurmaev & Partners law firm, suggests that if Shell decides to go to court, a lawsuit will be filed against Russia as a subject of law, since the decision, entailing the transfer of rights and obligations from Sakhalin Energy, was made by the President of the Russian Federation. However, the lawyer notes, Gazprom, the operator itself, which has lost control over the project, can also act as defendants in the lawsuit, and even Japanese companies that have retained their shares can act as co-respondents.

At the same time, Mr. Gorbunov doubts that Russia, even if it loses in an American court, will execute his decision, taking into account the current situation, law enforcement practice and the fact that the change of operator is completely legal from the point of view of Russian law. However, having a court decision, Shell can seize the defendants’ property in countries where it will be recognized, for example, in the EU. Most likely, the lawyer believes, Shell will try to request the maximum amount, including loss of investment in the project, lost profits, as well as compensation for losses from compliance with the sanctions policy. At the same time, as Dmitry Gorbunov notes, disputes involving the state as a defendant can last for years or even decades, if we recall the dispute between the Russian Federation and Noga.

The head of the K&P.Law Cyprus office, Irina Chebotareva, agrees that the lawsuit could drag on. Its terms will depend on the procedural activity of the parties, who will defend the Russian side, what grounds will lie in defense, and the political situation as a whole.

Olga Mordyushenko