Russia seeks over $1 billion in damages from British oil giant

Shell exited the Sakhalin-2 LNG joint venture in Russia’s Far East in 2022  

The Russian Prosecutor General’s office is seeking over €1 billion ($1.09 billion) in damages from UK-based energy giant Shell over a failed joint venture, the Moscow Arbitration Court told the media on Tuesday.

Shell walked away from the Sakhalin-2 liquefied natural gas (LNG) project in 2022 following the start of the Ukraine conflict. The major oil and gas development on Sakhalin Island in Russia’s Far East includes the country’s first LNG plant.  

Earlier this month, Russia’s Prosecutor General filed a lawsuit targeting eight subsidiaries of the Anglo-Dutch energy major, according to the court’s website. They are Shell plc, Shell Energy Europe Limited, Shell Global Solutions International B.V., Shell International Exploration & Production B.V., Shell Neftegaz Development, Shell Exploration & Production Services B.V., Shell Sakhalin Services B.V., and Shell Sakhalin Holdings В.V.

“They are seeking more than €1 billion in damages,” the court’s press service told RIA Novosti when asked about the case.

Gazprom Export, the Russian Energy Ministry, the government of Sakhalin Region, as well as Sakhalin Energy Investment and Sakhalin Energy companies are named as third parties, the court said in a filing.

In 2022, Russian President Vladimir Putin signed a decree transferring the property of Sakhalin Energy, the former operator of Sakhalin-2, to a new Russia-based operator, Sakhalin Energy LLC. The government allowed foreign owners, which included Japanese companies Mitsui and Mitsubishi, to take a stake in the new operator proportionate to their previous holding.

The two Japanese companies decided to retain their stakes in the LNG project and agreed to transfer their respective 12.5% and 10% holdings to the new operator. But Shell, which owned 27.5% minus one share in Sakhalin Energy, gave notice that it would not be taking a stake in the new entity, prompting Moscow to sell off its share.

In March, a subsidiary of Russian energy major Gazprom, Sakhalin Project, bought Shell’s stake for 94.8 billion rubles ($973.3 million), bringing its share in the project to 77.5%.

The funds were to be transferred to Shell for its stake in the Sakhalin-2 but, according to Kommersant daily, they will be frozen in a so-called ‘Type S’ account. Russia introduced such accounts early into the conflict with Ukraine as a countermeasure against Western sanctions. The main purpose of such heavily restricted accounts was preventing the movement of funds out of the country by entities from “unfriendly nations.”