Russia's Novatek Ready to Buy Shell's Share in Sakhalin-2, Media Reports

MOSCOW (Sputnik) - Russian energy company Novatek has informed the Russian government about its readiness to purchase UK energy company Shell's 27.5% share in the joint oil and gas project Sakhalin-2, Russian newspaper reported on Monday, citing sources.

Novatek has declared its readiness to buy Shell's share in the Sakhalin-2 project and asked the government to speed up the assessment of the damage done to the project by Shell in order to participate in the selection of the potential buyer, the newspaper said.

In August of last year, the Sakhalin-2 project changed its operator from Bermuda-registered Sakhalin Energy to Russian company Sakhalin Energy Investment Company Ltd., owning 50% in the Gazprom Sakhalin Holding. Japanese companies Mitsui and Mitsubishi accepted the change of jurisdiction and kept their shares in Sakhalin-2, which were 12.5% and 10% respectively.

Conversely, Shell with its 27.5% share refused to remain in the project and wrote off the value of its share worth $1.6 billion. The Russian government estimated the the Shell share's value at 94.8 billion rubles ($1.3 billion).

Russia is planning to check if Shell has done any ecological, technological or other damage, and potentially deduct the penalty from the money that Shell can get for its share, the newspaper said.

At the same time, Shell still has an off-take contract granting it 1 million tonnes of liquefied natural gas from Sakhalin-2 per year till 2028, the Russian newspaper reported, adding that the contract was signed with Sakhalin Energy and was not renegotiated with Sakhalin Energy Investment Company Ltd. making it invalid since August.

On February 2, Shell said that it still had two long-term contracts for LNG supply from Russia, one of them with Yamal LNG, but stopped getting supplies under one of the contracts in the third quarter of 2022.

At the moment the operator of Sakhalin-2 sells the amounts of LNG, previously supplied to Shell under the long-term contract, on the spot market, media reported.

It is still unclear what will happen to these gas amounts in the event Novatek joins in the project. The newspaper's sources said that it would be profitable for the company to take them, as the prices in the long-term contract are tied to oil and significantly lower than those on the spot market for LNG in Asia. However, other stakeholders, such as Gazprom, might be interested in the return of Shell's gas amounts to the project's joint pool and their staying on the spot market, thus distributing the profit between all the stakeholders of Sakhalin-2.

Sakhalin-2 is an oil and gas project which includes the exploration of the two oil and gas fields in the North-East of Sakhalin Piltun-Astokhskoye (oil mostly) and Lunskoye (gas mostly). The project's infrastructure includes, among other assets, a gas liquefaction plant with the estimated capacity of 9.6 million tonnes per year.