Shell has begun the “nightmare” task of extricating itself from its biggest Russian energy project as China’s state-owned companies line up as the only current option for western oil and gas majors divesting Russian assets that much of the world will not touch.
The UK-headquartered group is in “early stage negotiations” with Cnooc, CNPC and Sinopec over the sale of its 27.5 per cent stake in the Sakhalin-2 liquefied natural gas project, according to two people familiar with the matter.
Shell pledged to withdraw from its Russian investments in February after President Vladimir Putin’s invasion but has not said whether it will seek to sell the stake or just walk away.
Situated in Russia’s far east, the project is a key source of LNG for several fuel-hungry East Asian economies but with most energy companies reducing their exposure to Russia, Shell has few options.
“It is a nightmare negotiation,” said one industry veteran familiar with the project. While Shell will hope a sale can help it recoup some of the up to $5bn it expects to write down because of its exit from Russia, any Chinese deal would likely come at a big discount and require bilateral agreement between Russia and China, the person added. “That is likely to be the real negotiation playing out.”
In 2014, after Putin’s annexation of Crimea resulted in a round of western sanctions against Moscow, Chinese state companies made a series of investments in Russian LNG projects and agreed with Gazprom to build a 2,200km gas pipeline from eastern Siberia to northern China.
James Waddell at consultancy Energy Aspects expects to see another series of deals with favourable terms for China. “We’re in a similar but worse situation for Russia,” he said. “The only buyer for this stuff is China.”
Other western energy companies with assets to divest include ExxonMobil, which operates the neighbouring oil and gas project Sakhalin-1, and BP, which has pledged to divest its 19.75 per cent stake in Russia’s state-backed oil producer Rosneft.
Inaugurated in 2009, Sakhalin-2 produced roughly 11.6mn tonnes of LNG in 2020, of which Shell would have collected roughly 3.2mn tonnes, largely for onward sale in East Asia. The other shareholders are Gazprom, which owns just over 50 per cent of the project, and Japanese trading houses Mitsui and Mitsubishi, which hold 12.5 per cent and 10 per cent respectively.
Shell and Mitsubishi declined to comment. Mitsui did not respond to calls seeking comment.
The other Sakhalin-2 shareholders have not been asked to approve the release of project information to any third party, a person familiar with the matter said, in a further sign that Shell’s talks with the Chinese state companies remain at an early stage.
Cnooc, CNPC and Sinopec did not immediately respond to requests for comment on the talks, which were first reported by Bloomberg.
Hirokazu Matsuno, Japan’s chief cabinet secretary, declined to discuss the business negotiations of individual companies but stressed that, in general, the possibility of a Chinese acquisition demonstrated why it was important for Japan’s trading houses not to divest.
“If Japan were to withdraw from the project and Russia or a third country were to acquire the concession, we are concerned that this would lead to a further rise in resource prices and favour Russia, and would not be an effective sanction,” he said on Friday.
Japan sees continued access to LNG from Sakhalin island as vital to its energy security but has banned Russian coal imports and agreed with G7 allies to reduce its overall reliance on Russian energy.
Mitsui and Japan’s state-run Jogmec also own 10 per cent of the Arctic LNG 2 project on Russia’s Gydan peninsula, alongside Russian group Novatek, France’s TotalEnergies and China’s Cnooc.
Additional reporting by Gloria Li