THE SHELL LEAKS FILES
SLF-2007-026
The Sakhalin Papers XVI: The Permit, the Prosecutors and Gazprom
Archive reference: SLF-2007-026
Collection: The Sakhalin Papers
Principal record: Shell Sustainability Report 2006; official Kremlin transcript of the 21 December 2006 Sakhalin Energy shareholders’ meeting; Gazprom corporate records
Supporting record: contemporaneous Reuters and oil-industry reporting; EBRD records; Russian court proceedings as reported contemporaneously; subsequent UK tribunal and High Court proceedings concerning governmental scrutiny of Sakhalin II
Evidence standard: corporate admissions, government statements, judicial findings, regulatory allegations and commentary are kept separate.
Introduction
By the closing months of 2006, Sakhalin II was no longer simply an oil and gas construction project suffering environmental controversy.
It had become a contest over control.
Shell entered that year as the dominant shareholder in Sakhalin Energy, holding 55 per cent. By the following spring its interest would be cut to 27.5 per cent, while Russia’s state-controlled Gazprom would acquire 50 per cent plus one shareand become the majority shareholder. Shell’s own Sustainability Report records a price of $7.45 billion for the controlling stake acquired from Shell, Mitsui and Mitsubishi.
Between those two positions came environmental investigations, threats to licences, intervention by Russian prosecutors, disputes about the project’s development budget, intense negotiations and finally a meeting inside the Kremlin.
The documentary question is not whether environmental problems existed.
Shell’s own records demonstrate that they did.
The harder question is whether those problems alone explain how Shell lost control of one of the most important projects in its global portfolio.
The surviving record suggests a more complicated answer.
1. Shell’s Own Description: “Resource Nationalism”
Shell did not subsequently pretend that the political environment surrounding Sakhalin II was ordinary.
In its 2006 Sustainability Report, Chief Executive Jeroen van der Veer was explicitly asked about the return of “resource nationalism” and its effect on Sakhalin.
His answer acknowledged that high energy prices encouraged producing governments to revisit royalties, taxes and relationships with foreign investors. He said that life had clearly become more difficult on Sakhalin and described the eventual resolution as the product of difficult negotiations.
That wording is significant.
It came from Shell itself.
The company’s retrospective public account therefore did not frame the Sakhalin upheaval solely as an environmental enforcement episode.
It placed it in the wider context of governments seeking greater influence over valuable energy resources.
2. The Environmental Problems Were Not Invented
That does not mean the environmental case against Sakhalin II was fictitious.
The preceding files in this series have documented the record involving Western gray whales, salmon rivers, pipeline construction, erosion, contractor non-compliance and monitoring deficiencies.
Shell’s 2006 Sustainability Report again acknowledged that contractors had previously failed to follow required low-impact methods at sensitive river crossings. Shell said Sakhalin Energy had stopped work, improved controls, involved outside specialists and introduced independent monitoring. It also acknowledged that some rivers subsequently experienced more sedimentation than planned.
Shell maintained that the likely consequences for salmon spawning grounds were limited and temporary.
That was Shell’s assessment.
Russian regulators would take a much harsher view.
3. The Permit Becomes a Weapon
In September 2006 Russia’s Ministry of Natural Resources moved against the environmental approval underpinning Phase 2 of Sakhalin II.
Contemporaneous Oil & Gas Journal reporting records that the Ministry acted on 18 September, citing inadequate environmental safeguards and effectively threatening the continuation of construction until revised measures were approved. Sakhalin Energy rejected the legal basis for the action and said the issues raised by the Russian environmental authorities were being addressed.
The dispute concerned an approval commonly identified in the contemporary record through Order 600, relating to the state environmental expert review for Phase 2.
Sakhalin Energy’s position was unusually pointed.
According to the company’s statement reproduced in contemporary industry reporting, the environmental approval had been successfully defended in a Russian court as recently as 29 August 2006.
Then the procedure changed.
Russian authorities withdrew a separate court action seeking revocation and instead moved administratively against the approval. Contemporary reporting interpreted the manoeuvre as removing the immediate dispute from the scheduled judicial process.
That procedural sequence deserves attention.
A project approval survives a court challenge.
Weeks later, the regulatory pressure returns by another route.
4. The Prosecutor General Enters the Story
The pressure was not confined to environmental inspectors.
Contemporaneous reports state that the Russian Prosecutor General’s office challenged the legality of the environmental approval and called for the underlying decision to be cancelled. The Natural Resources Ministry subsequently acted to revoke or rescind the approval.
Again, this does not prove that the prosecutors were acting improperly.
Governments are entitled to enforce environmental law.
Prosecutors are entitled to challenge decisions they believe were unlawfully made.
But the scale and timing of the intervention inevitably became part of the political argument because Sakhalin II occupied a unique position.
At that point it was a giant Russian energy project without a Russian shareholder.
And Gazprom wanted in.
5. Gazprom Had Already Been Negotiating
It would be inaccurate to suggest that Gazprom suddenly appeared only after environmental pressure began.
The official Kremlin transcript of the 21 December 2006 meeting records President Vladimir Putin saying that Shell had invited Gazprom to cooperate on Sakhalin II several years earlier.
Gazprom Chairman Alexei Miller likewise said negotiations concerning Gazprom’s participation and a joint LNG business had been taking place for approximately two years.
That is an important corrective to any simplistic narrative.
Gazprom’s entry had been under discussion before the regulatory crisis.
What changed was the scale of the entry.
An earlier concept involving minority participation became majority control.
6. The Cost Problem
Running alongside the environmental controversy was a serious commercial dispute.
Phase 2 had become a roughly $20 billion development. Shell’s own 2006 Sustainability Report described it as the world’s largest and most complex oil and LNG project then under construction and said approximately 80 per cent of the work had been completed by the end of the year.
The project’s rising cost mattered particularly because Sakhalin II operated under a Production Sharing Agreement.
Under that structure, project costs were recoverable before the Russian state received the full benefit of subsequent revenues.
Higher recoverable costs therefore affected the timing and scale of Russia’s economic return.
Contemporaneous Reuters reporting linked the cost escalation to the collapse of an earlier prospective asset swap with Gazprom and noted Russian anger over the increased development budget.
Environmental disputes and economics were consequently converging.
7. Shell Faces Pressure on Several Fronts
By the autumn of 2006, Sakhalin Energy was confronting environmental inspections, threats concerning licences and permits, criticism over construction practices and unresolved negotiations concerning the development budget.
Shell’s own Sustainability Report later acknowledged that the Russian environmental agency had threatened crucial licences in October 2006, alleging environmental-permit violations. Shell maintained that those alleged violations would not have produced long-term environmental damage and said Sakhalin Energy prepared an Environmental Action Plan in response.
The distinction is important.
Established fact: Russian regulators alleged violations.
Shell’s position: the alleged violations did not justify the threatened regulatory consequences and would not have caused long-term environmental damage.
Those are not the same proposition.
Both belong in the record.
8. Contemporary Observers Suspected a Larger Purpose
Reuters and other contemporary organisations openly reported suspicions that environmental enforcement was being used to improve Russia’s bargaining position.
On 11 December 2006, Reuters reported that Shell had agreed in principle to surrender control of Sakhalin II to Gazprom after months of governmental pressure. The report noted that environmental regulators had accused the project of ecological violations while industry analysts suspected the campaign was also designed to secure better terms and Russian participation.
Oil & Gas Journal similarly reported contemporaneous suspicions that the pressure was intended to improve the prospects of a Russian company joining the project.
Those suspicions should not be upgraded retrospectively into proven fact.
But neither can they be edited out of the historical record.
They were being expressed before the transfer of control was completed.
9. 21 December 2006: The Kremlin
Then came the decisive meeting.
On 21 December 2006, Shell, Mitsui, Mitsubishi and Gazprom representatives met at the Kremlin with Vladimir Putin.
The official Kremlin transcript records Alexei Miller announcing that the companies had signed a protocol under which Gazprom would acquire 50 per cent plus one share of Sakhalin Energy for $7.45 billion.
The effect was straightforward.
Shell’s 55 per cent holding would fall to 27.5 per cent.
Mitsui’s 25 per cent would become 12.5 per cent.
Mitsubishi’s 20 per cent would become 10 per cent.
Gazprom would control the company.
Sakhalin Energy would remain project operator.
Shell would remain involved in management and continue as technical adviser.
But control was gone.
10. Environmental Complaints Were Discussed in the Same Room
The official Kremlin transcript is particularly valuable because the ownership deal and environmental dispute appear in the same record.
Putin referred to what he characterised as reasonable complaints from Russian environmental supervision authorities and said the investors had prepared a large-scale environmental programme in response.
Van der Veer, in turn, acknowledged environmental concerns and emphasised Shell’s commitment to high international standards and continued cooperation with the Natural Resources Ministry.
This does not prove a quid pro quo.
There is no sentence in the transcript saying:
Give Gazprom control and the environmental problems disappear.
The documentary record does not justify putting such words into anyone’s mouth.
But it does establish that the two matters — majority ownership and resolution of environmental disputes — were being addressed simultaneously at the highest political level.
11. The Tone Changed Quickly
Shell’s subsequent public presentation of the agreement was notably conciliatory.
The 2006 Sustainability Report said Sakhalin II had emerged from a “tumultuous 2006” with Gazprom coming in and an agreement in principle reached with the Russian Government on an amended Phase 2 development budget. Shell described those developments as important steps toward completing construction and delivering LNG.
Van der Veer said the project would benefit from the long-term presence of a strong Russian partner and expressed confidence that Gazprom understood the technical, managerial, environmental and social requirements of the venture.
This was corporate diplomacy after a bruising confrontation.
Whether it represented enthusiasm, realism or both is commentary.
The underlying change in control is not.
12. April 2007: The Transfer Becomes Contractual
The December protocol was followed by the formal transaction.
Gazprom’s official corporate history records that on 18 April 2007 Gazprom and the existing Sakhalin Energy shareholders signed the Purchase and Sale Agreement giving Gazprom the 50 per cent plus one share controlling interest.
Gazprom’s later corporate records consistently describe the resulting ownership structure.
Shell retained 27.5 per cent.
Mitsui retained 12.5 per cent.
Mitsubishi retained 10 per cent.
Gazprom held the majority.
Thus the December political agreement became a completed corporate transfer.
13. The EBRD Walks Away From the Existing Financing Process
The ownership change had another consequence.
The European Bank for Reconstruction and Development had spent years considering financing for Sakhalin II and examining the project’s environmental and social safeguards.
Its internal recourse record states that on 11 January 2007, because of the change in ownership, the EBRD decided not to finance the project under the proposal it had been considering.
Contemporaneous reporting records that the Bank regarded Gazprom’s majority acquisition as a material change to the project and said the existing financing process could no longer continue in its previous form.
Shell’s Sustainability Report also acknowledged that Gazprom’s entry and the altered shareholding structure had led the EBRD to end its review of the existing funding proposal.
The project survived.
But the institutional framework around it had changed.
14. The Court Record: An Important Limitation
The Russian litigation requires particular caution.
Contemporary Sakhalin Energy statements said its environmental approval had survived a Russian court challenge on 29 August 2006. Industry reporting also records that a later regulatory lawsuit seeking revocation was withdrawn when the Government pursued administrative action instead.
A publicly accessible copy of the August Russian judgment has not been located for this instalment.
Accordingly, this archive does not pretend to have independently analysed that court’s reasoning.
What can safely be recorded is the contemporaneous procedural account:
the operator said the approval had been upheld;
the authorities subsequently changed course;
and the battle moved from the scheduled court proceeding into administrative and political channels.
That is as far as the available record permits us to go.
15. A British Legal Record Adds Transparency, Not an Environmental Verdict
Sakhalin II later generated a separate legal record in Britain concerning governmental transparency.
Friends of the Earth sought disclosure of interdepartmental UK government communications relating to potential export-credit support for the project.
The UK Information Tribunal ordered disclosure in 2007, placing weight on the scale, environmental sensitivity and public importance of Sakhalin II.
The Export Credits Guarantee Department appealed.
In Export Credits Guarantee Department v Friends of the Earth, Mr Justice Mitting dismissed that appeal in March 2008.
That judgment did not establish that Shell had breached Russian environmental law.
It did not rule on the legitimacy of Gazprom’s acquisition.
Its significance is narrower.
It confirms, through an actual judicial record, that governmental decision-making surrounding potential public support for Sakhalin II was considered sufficiently important to justify disclosure after the statutory public-interest balancing exercise.
16. What the Documents Establish
By the end of the episode, several propositions are documentary rather than speculative.
Shell began 2006 with a 55 per cent interest in Sakhalin Energy.
Environmental problems had arisen during construction, some of which Shell itself acknowledged.
Russian regulators escalated their intervention dramatically during 2006.
Russian prosecutors challenged the environmental approval.
Sakhalin Energy disputed the legal basis and seriousness of the allegations.
Gazprom had already been negotiating to join Sakhalin II before the regulatory crisis.
The ownership negotiation ultimately produced something much larger than the earlier minority-entry concept.
On 21 December 2006 the parties signed a protocol giving Gazprom 50 per cent plus one share for $7.45 billion.
The transaction reduced Shell’s interest to 27.5 per cent.
The change in ownership caused the EBRD to discontinue the financing proposal it had been considering.
Those are the fixed points in the record.
17. What the Documents Do Not Establish
The record does not prove that every Russian environmental allegation was fabricated.
Shell’s own documents make that proposition untenable.
Nor does it establish that Gazprom’s acquisition was ordered by a court or formally imposed through expropriation.
The shares were transferred through negotiated corporate agreements.
The record also does not establish a written bargain under which environmental enforcement would cease in exchange for majority ownership.
No such document is relied upon here.
Equally, however, the evidence does not support treating the ownership transfer as an ordinary commercial transaction divorced from governmental pressure.
Contemporaneous reporting, Shell’s own discussion of resource nationalism, the chronology of licence threats and the Kremlin-level negotiations all make the political context impossible to ignore.
Documentary Findings
Established: Sakhalin II experienced genuine environmental-management failures. Shell acknowledged contractor non-compliance, excessive sedimentation at some rivers and the need for stronger controls.
Established: Russian environmental authorities threatened vital licences and alleged permit violations in 2006. Shell disputed the severity and long-term consequences of those alleged violations.
Established: Sakhalin Energy said the relevant environmental approval had survived a Russian court challenge shortly before the Government altered its regulatory approach.
Established: Gazprom had been discussing participation in Sakhalin II before the environmental confrontation, but the eventual transaction gave it majority control.
Established: Shell’s interest fell from 55 per cent to 27.5 per cent after the agreement to sell Gazprom 50 per cent plus one share for $7.45 billion.
Established: contemporaneous reporters and analysts suspected that regulatory pressure was also serving Russian strategic and commercial objectives. That suspicion was contemporaneous opinion, not a judicial finding.
Established: Gazprom’s entry materially changed the project and ended the EBRD financing process then under consideration.
Commentary
The temptation with Sakhalin II is to choose between two neat stories.
In the first, Shell behaved irresponsibly, Russia finally enforced its environmental laws and Gazprom arrived as a stabilising domestic partner.
In the second, the Kremlin invented an environmental crisis purely to seize a strategic energy asset from foreigners.
The documentary record does not fit comfortably inside either version.
There were genuine environmental failures.
There was also unmistakable state pressure.
Gazprom had legitimate commercial reasons to want Sakhalin II.
The Russian Government had legitimate reasons to care about costs under the Production Sharing Agreement.
But the concentration of regulatory, prosecutorial and political pressure during the same period in which majority control was being negotiated is historically significant.
Shell itself supplied perhaps the most revealing phrase.
Resource nationalism.
That does not mean the environmental evidence was false.
It means environmental enforcement took place inside a much larger struggle over who controlled Russia’s strategic resources and who captured their economic value.
The final outcome was striking.
Shell remained.
Its technology remained.
Its technical-adviser role remained.
Its investment remained.
The project remained.
What Shell lost was control.
And the company that gained it was Russia’s state-controlled gas champion.
Source Record
This instalment is grounded principally in Shell’s authenticated Sustainability Report 2006, including Jeroen van der Veer’s discussion of resource nationalism, Shell’s account of the environmental-permitting dispute and the recorded terms of Gazprom’s entry.
It is cross-checked against the official Kremlin transcript of the 21 December 2006 meeting with Sakhalin Energy shareholders; Gazprom’s official corporate records concerning the April 2007 Purchase and Sale Agreement; EBRD documentation recording the termination of its financing consideration after the ownership change; contemporaneous Reuters and Oil & Gas Journal reporting; and the subsequent UK Information Tribunal and High Court records concerning disclosure of government material related to Sakhalin II.
Where the original Russian court judgment of August 2006 has not been independently retrieved, this instalment relies only on the contemporaneous description of its outcome and expressly does not attribute findings beyond that record.
Site wide disclaimer also applies.
Next Archive File
SLF-2007-027 — The Sakhalin Papers XVII: The Kremlin Attack Dog and the Donovan Connection
The ownership battle did not unfold through corporate documents and government ministries alone.
Behind the regulatory offensive was one of the most colourful figures in the Sakhalin story:
Oleg Mitvol, deputy head of Rosprirodnadzor.
The British press called him a Kremlin attack dog.
He inspected Sakhalin II.
He publicly attacked Shell’s environmental performance.
He threatened enormous claims.
And, crucially for this archive, he later identified John Donovan as a source of information concerning Sakhalin II.
The next instalment will move from the public regulatory battle to the documentary trail behind it.
What information reached Mitvol?
Where did it originate?
What did Shell know?
What can authenticated correspondence establish?
And where does the surviving evidence end and subsequent recollection begin?
SLF-2007-027 will examine the Donovan–Mitvol connection without embellishment: the emails, the reporting, the admissions and the consequences.
*This website and sisters royaldutchshellgroup.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net, and shellwikipedia.com, are owned by John Donovan - more information here. There is also a Wikipedia segment, the Shell DPA Files, "Shell and the Spies", the Shell Leaks files, as well as books written and published by John Donovan - Kindle eBooks. Timeline of the Donovan Shell Feud. Toxic History of Royal Dutch Shell Group. Shell and the Donovans: The Full Media Record — 550+ Articles, 110 Books, 40 Years. *All created and supported by internet wizz, Nick Gill.
