Sakhalin-2: Shell is Planning to get Compensation After Withdrawal From Project

Sakhalin-2: Shell is Planning to get Compensation After Withdrawal From Project


Shell plc continues to work to reach an agreement that will allow it to withdraw from the Sakhalin-2 project in accordance with all applicable legal requirements.

Sakhalin-2, the first liquefied natural gas (LNG) plant, was based in Russia back in 2009. By the way, it is the second largest LNG project in Russia, which has a capacity of 10 million tons of liquefied natural gas per year. As a result, two fields began to be developed, Piltun-Astokhskon, mainly oil deposit, and Lunskoye, mainly gas one. The shareholders of this project were Gazprom (50% +1 share), British Shell (27.5%), Japanese Mitsu (12.5%) and Mitsubishi (10%.)

It should be noted that Shell's long-term contract with Sakhalin-2, under which it receives 1 million tons of LNG per year, ends in 2028.

Back on June 30, Russian President Vladimir Putin signed a decree, according to which the operator of Sakhalin Energy, registered in the Netherlands, would be replaced by the Russian legal entity Sakhalin Energy, registered in Yuzhno-Sakhalinsk. On August 19, the new operator started operations. Foreign buyers were invited to renegotiate all long-term contracts on the previous terms. By the way, now there is an opportunity to pay in other currencies in case payment in dollars is impossible. The transaction will go through Russian banks.

However, Shell decided not to re-sign the long-term agreement with Sakhalin-2, but to wait until the contract is terminated and claim compensation for the loss of LNG, based on the 5-fold difference between the cost of Sakhalin liquefied natural gas under this contract and its current spot market price.

Nevertheless, Japanese corporations Mitsu and Mitsubishi still participate in the Sakhalin-2 project. According to Hirokazu Matsuno, Japan's Chief Cabinet Secretary, they will “retain stakes” in the new company, the project operator, but it is up to the Russian government to “decide” whether or not to approve their participation.

“By creating such conditions, we are pushing both the companies themselves and the countries we have declared unfriendly to finally make a decision,” Stanislav Mitrakhovich, an energy security expert at the Financial University under the Russian Government, told “In essence, they have declared that they do not need to work in Russia. On the other hand, if they intend to work in our country in the future, they will have to re-register according to the new rules, at the same time explaining to their American friends that it is still right to meet Russia halfway, especially when it comes to important projects.”

Moreover, according to part of the expert community, the withdrawal of foreign companies from Russian projects may raise the question of the possibility of their further development. On the other hand, due to the sanctions policy, the amount of capital expenditures on Russian energy projects may be reduced by 5-20%.

According to Alexander Osin, a trading analyst at Russian stock market Freedom Finance, the strengthening of sanctions threats “limits investment” in the extractive and energy industries, and ultimately translates into “deficit formation.” According to him, the volume of estimated industry CAPEX in the coming quarters “will be reduced.”

Nevertheless, Igor Yashkov, a leading analyst at the Financial University and the National Security Foundation, told the media that Russia “is unlikely to suffer from these measures.” According to him, the U.S. imposed sanctions “in the most general terms,” and they always have “a bunch of exceptions.”

“But if one party does decide to hit the energy sector with sanctions, it will lead to a global energy crisis. So far, we see that energy is almost the last link that connects us to the West,” Yashkov said in conclusion.

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