Shell’s looming billion-dollar blood-money payday

The company’s pay-out from the Sakhalin-II oil and gas fields would cover 1/10th of all the damage Russia has done to Ukraine’s energy infrastructure during the war

Shell claimed it had left Russia for good, and wrote off its Russian assets as losses. Now, the oil giant stands to net more than $1 billion after Novatek, a Russian gas company, bid for Shell’s stake in the Sakhalin-II project, a major oil and  gas development in the Far East.

The war in Ukraine has been more uncomfortable for Shell than most oil companies. There was the ill-fated, opportunistic purchase of a discounted cargo of Russian crude as tanks were bearing down on Kyiv. Shell apologised profusely, gave the profits from the transaction to humanitarian programs in Ukraine, and swore off Russian oil.

There was also the debacle over so-called ‘Latvian blends’, when Shell was caught allowing itself to trade Russian diesel, so long as it was mixed with fuel from other countries. The firm ultimately reversed that decision.

On their investments in Russia, including their 27.5% stake in the Sakhalin-II fields, Shell seemed to beat a surer path. To a fanfare of headlines, they announced they would exit Russia – taking what they called ‘decisive action’ by writing down their investments, including Sakhalin-II.

In doing so, they became members of a club of Western oil majors that now includes TotalEnergies, which wrote down its stake in Novatek; BP, which wrote down its stake in Rosneft, and Wintershall, which wrote down its stake in Achimgaz.

Writing down an asset is an accounting measure, in which a company deconsolidates or, in plain English, stops counting the value of an asset in its portfolio. It does not change the legal ownership of the asset.

But for political reasons, Shell’s investment in Sakhalin-II looked done and dusted, as the Russian government expropriated the project’s assets in June last year . The Kremlin made all companies invested in the Sakhalin projects re-apply to maintain their shareholding. That was a bridge too far for Shell. The company refused, and the business press reported it would walk away from the venture with nothing,.

Now, Russian media are reporting that the Kremlin has approved a bid for Shell’s stake in Sakhalin-II from Novatek for $1.16 billion. What’s more, Novatek said it requested and received explicit presidential approval to transfer the funds directly to Shell, not into a restricted Russian account.

Responding to Global Witness, Shell confirmed that it still holds the stake in Sakhalin-II but didn’t comment on the Novatek bid.

It’s unclear whether Shell has any agency in this deal. It seems unlikely that they will reject it. But the bid means that for all the headlines proclaiming their exit, for all the talk of impairments and write-downs, Shell may net more than $1 billion from a Russian gas project which they had declared a loss, after more than a year of war crimes in Ukraine, and after the company’s most profitable year in over a century.

This saga demonstrates how meaningless ‘writing down’ really is, in the context of Russian oil and gas assets in 2023. A promise from an oil company not to touch assets because of moral and not legal obligations should be taken with the world’s largest pinch of salt.

Regardless, should Shell receive any money from the sale, it’s clear what should happen to it. Ukrainian officials have demanded that companies who remained invested in Russia’s fossil fuel sector should redirect the proceeds of any wartime dividends or asset sales to the reconstruction of Ukraine. British MPs have concurred.

Shell’s blood money payday could go a long way to helping rebuild Ukraine with green energy infrastructure. The Ukrainian government and World Bank’s latest estimate is that current reconstruction costs will stretch to at least $411 billion. Shell’s pay-out would cover more than 1/10th of the extensive direct damage done to Ukraine’s energy infrastructure by Russian attacks in the past year, which left millions across Ukraine without heating or electricity through long periods of the winter.

If the company refuses to do the right thing, its shareholders should force the issue at its upcoming AGM on May 23rd. And, in the likely absence of any voluntary action on Shell’s part, the UK government must legislate to ensure that any assets brought back from Russia by British companies during this war are put to their proper use – for the people of Ukraine, not for shareholders.