THE SHELL LEAKS FILES: 11 OCTOBER 2026
SLF-2007-084
The Sakhalin Papers LXXIV: The Field Washington Targeted — Shell, Gazprom and the Sanctions That Threatened Their LNG Expansion
On 18 June 2015, Ben van Beurden and Alexey Miller signed agreements intended to transform Shell’s relationship with Gazprom into a much broader strategic partnership. Central to their ambitions was a third LNG production train at Sakhalin II, supplied with additional gas from the Russian-controlled Sakhalin III project. Seven weeks later, on 7 August, the United States imposed export restrictions specifically targeting the Yuzhno-Kirinskoye field — one of the most important potential sources of that additional gas. The timing exposed an extraordinary contradiction: while Shell and Gazprom were seeking to deepen their commercial relationship, Washington was restricting access to the technology needed to develop resources central to their expansion plans.
Archive reference: SLF-2007-084
Collection: The Sakhalin Papers
Principal authenticated records: Gazprom corporate announcements of 18 June 2015 concerning strategic cooperation, Sakhalin II expansion and European gas transmission infrastructure; US Department of Commerce, Bureau of Industry and Security, final rule published 7 August 2015, Federal Register document 2015-19274, 80 FR 47402; Royal Dutch Shell plc Annual Report and Form 20-F 2014, filed with the SEC on 12 March 2015.
Contemporaneous reporting: Reuters, 18–19 June and 7–10 August 2015; Bloomberg, 7 August 2015; New Europe, 7 August 2015; contemporaneous reports preserved in the Donovan Shell archive.
Judicial context: Court of Justice of the European Union, PJSC Rosneft Oil Company v HM Treasury, Case C-72/15, judgment of 28 March 2017. The judgment concerns the validity and interpretation of EU sanctions measures, not Shell’s conduct or the separate US export-control designation examined here.
Evidence standard: Official corporate announcements establish what the companies signed and publicly proposed. The US Federal Register establishes the legal effect of the August restrictions. Reported proposals for asset exchanges are distinguished from completed transactions. Predictions concerning commercial consequences are attributed to contemporary analysts. No sanctions violation or unlawful activity by Shell is alleged or established.
Introduction: Seven weeks between ambition and obstruction
The previous instalment, The Shell Leaks Files — 10 October 2026, examined the extraordinary position in which Shell found itself during 2014.
Western sanctions had already forced the company to suspend certain Russian shale-exploration activities.
Yet Shell continued to discuss expanding Sakhalin II with Gazprom.
The existing LNG plant remained operational.
Shell retained its minority interest.
And the proposed third production train remained a potentially attractive investment.
By June 2015, Shell and Gazprom were prepared to formalise their ambitions.
The agreements signed at the St Petersburg International Economic Forum went considerably beyond maintaining an established LNG project.
They contemplated wider cooperation across the gas industry.
They raised the possibility of exchanging assets.
They advanced preparations for an additional Sakhalin LNG train.
And, through a separate memorandum signed the same day, Shell became involved in plans for substantial new Russian gas-export infrastructure to Europe.
The strategic significance was unmistakable.
Shell was positioning itself as an increasingly important international partner of Russia’s state-controlled gas company.
But the expansion depended upon resources that Shell did not control.
Those resources lay within Sakhalin III.
And in August 2015, Washington intervened.
The US government did not merely impose another general restriction on Russian companies.
It placed a specific offshore oil and gas field on its Entity List.
The field was Yuzhno-Kirinskoye, also known as South Kirinsky.
The decision had direct implications for the ambitions announced in June.
The primary documents allow us to reconstruct how this confrontation developed.
1. The central corporate record: 18 June 2015
On 18 June 2015, Gazprom issued an official announcement entitled:
“Gazprom and Shell sign several strategic documents.”
The announcement identifies Alexey Miller, chairman of Gazprom’s Management Committee, and Ben van Beurden, chief executive of Royal Dutch Shell, as the signatories.
The first document was an Agreement of Strategic Cooperation.
According to Gazprom, it provided for developing the partnership across the gas industry, from exploration and production through processing and marketing.
It also contemplated a possible exchange of assets.
Gazprom described the agreement as creating opportunities to expand the companies’ joint project portfolio.
The second document concerned Sakhalin II.
Miller and van Beurden signed a memorandum addressing implementation of the proposed third LNG production train.
Gazprom presented this as an important advance towards the project’s investment phase.
But the announcement also made clear that preparations for a final investment decision remained necessary.
The memorandum established principles for the companies’ cooperation and addressed the design schedule and further project-development steps.
It did not announce that construction had already been irrevocably authorised.
This distinction matters because contemporary headlines sometimes described the companies as having agreed to build the third train.
The authenticated record is more precise.
They had advanced the project and expressed a commitment to pursuing it.
The final investment decision still lay ahead.
Primary source: Gazprom — Gazprom and Shell sign several strategic documents, 18 June 2015
2. A decisive provision: Gazprom would provide Sakhalin III gas
The June announcement contains a particularly important provision.
Gazprom stated that the additional gas needed to operate the third LNG train at full capacity would come from Sakhalin III.
This was not an incidental detail.
It linked two separate projects with different ownership and commercial arrangements.
Sakhalin II was operated by Sakhalin Energy Investment Company.
Its shareholders were:
- Gazprom: 50 per cent plus one share.
- Shell: 27.5 per cent minus one share.
- Mitsui: 12.5 per cent.
- Mitsubishi: 10 per cent.
Sakhalin III, by contrast, included offshore resources held under licences controlled by Gazprom.
Shell did not automatically possess an ownership interest in those resources merely because it was a shareholder in Sakhalin II.
Consequently, the proposed expansion depended upon arrangements between the two projects.
Gazprom would have to make additional gas available.
Commercial terms would have to be agreed.
Infrastructure and processing arrangements would have to accommodate the increased supply.
And the additional resources would have to be developed.
The June memorandum identified Sakhalin III as the intended source.
It did not, however, publicly demonstrate that every resource-allocation, financing or production-development question had been resolved.
That distinction would become particularly important two months later. Gazprom
3. Why South Kirinsky mattered
The Yuzhno-Kirinskoye field lay in the Sea of Okhotsk, offshore Sakhalin Island.
It formed part of Gazprom’s Sakhalin III development programme.
Gazprom’s wider Sakhalin III interests included the Kirinsky block, containing several gas and condensate fields.
The neighbouring Kirinskoye field had already demonstrated the technical complexity of offshore development in the region.
In October 2013, Gazprom announced the successful testing of Russia’s first subsea production facility at Kirinskoye.
The development involved offshore wells, subsea infrastructure and an onshore processing complex.
The equipment had to operate in difficult marine conditions, including periods of extensive sea ice.
Gazprom subsequently identified Yuzhno-Kirinskoye and other nearby fields as potential contributors to the wider production system.
These were not resources that could be brought into production simply by signing a memorandum.
They required significant investment and specialised technology.
Gazprom’s own project description confirms the importance of advanced subsea systems to the Sakhalin III programme. Gazprom
The scale of Yuzhno-Kirinskoye was substantial.
Contemporary Bloomberg reporting cited estimated gas resources of approximately 637 billion cubic metres, together with approximately 97 million tonnes of oil and condensate.
Reuters subsequently reported broadly comparable figures.
Those were reported estimates, not a guarantee that every identified resource could be produced economically or within the original development timetable.
Nevertheless, the potential was considerable.
Gas from Sakhalin III could support regional energy infrastructure and, potentially, expansion of LNG exports through Sakhalin II. Royal Dutch Shell Group .com
That made the field strategically important to Gazprom.
It also made the field relevant to Shell’s LNG ambitions.
4. Reuters identifies the larger strategic relationship
The day after the June signing ceremony, Reuters published an important interview with Alexey Miller.
Reported by Dmitry Zhdannikov and Denis Pinchuk on 19 June 2015, the interview presented the Shell relationship as something much more ambitious than a single LNG project.
Miller discussed the prospect of a global strategic alliance.
Possible asset exchanges featured prominently.
He also linked the relationship to Shell’s proposed acquisition of BG Group.
That transaction, announced earlier in April 2015, would substantially increase Shell’s global LNG portfolio if completed.
Miller regarded Shell’s expansion as creating additional opportunities for cooperation.
Reuters also reported that Gazprom expected the companies’ relationship to include Sakhalin LNG expansion and potentially wider international activities.
The report is valuable because it records Miller explaining the strategic purpose behind the official agreements.
Gazprom was seeking more than technical assistance at Sakhalin.
It wanted an international partner with substantial experience in production, LNG marketing and access to global markets.
Shell offered precisely those capabilities.
For Shell, the relationship offered access to Russian gas resources and the possibility of developing further projects.
The prospective exchange of assets was especially significant.
But the evidence must not be overstated.
The June agreement provided for possible asset exchanges. It did not establish that a particular exchange had been completed.
Reuters treated the wider alliance as a developing commercial strategy rather than a finished transaction. Business Standard
Contemporaneous source: Reuters — Gazprom building global alliance with expanded Shell, 19 June 2015
5. Another June agreement: the European dimension
Something else happened on 18 June 2015.
During the same St Petersburg forum, Gazprom, Shell, E.ON and OMV signed a separate Memorandum of Intent concerning additional gas-transmission infrastructure across the Baltic Sea.
The proposal envisaged two further offshore pipeline strings providing direct supplies of Russian gas to European consumers.
The planned additional capacity was approximately 55 billion cubic metres annually.
The project would subsequently become known as Nord Stream 2.
Gazprom’s official announcement identifies van Beurden as one of the signatories.
It also records Shell’s commercial justification for supporting new infrastructure.
Van Beurden argued that natural gas would remain important to Europe’s energy mix and that declining European production created a need for new supply arrangements. Gazprom
This is a significant part of the documentary chronology.
The Sakhalin partnership was no longer the only major initiative under discussion.
Shell and Gazprom were pursuing opportunities at opposite ends of Russia.
Sakhalin offered LNG exports towards Asian markets.
Additional Baltic pipelines offered the prospect of transporting more Russian gas directly to Western Europe.
These were separate projects.
They involved different infrastructure, commercial arrangements and regulatory questions.
But they formed part of the wider strategic relationship described by Miller.
The political context was unavoidable.
Russia had annexed Crimea in 2014.
Western sanctions were already in force.
The conflict in eastern Ukraine continued.
Yet major Western energy companies were still entering agreements for possible new Russian energy infrastructure.
The companies presented their decisions in commercial terms.
The Russian government had obvious reasons to welcome continued Western participation.
The June documents establish the corporate decisions.
They do not establish that Shell endorsed Russian government policy.
6. July 2015: Shell explores an interest in Sakhalin III
The strategic cooperation agreement raised an obvious question.
What assets might Shell and Gazprom exchange?
One possibility discussed in contemporary reporting involved Shell obtaining an interest in Sakhalin III.
This would potentially give Shell greater involvement in the resources intended to support Sakhalin II expansion.
That possibility was commercially logical.
Shell already possessed LNG expertise and a stake in the existing liquefaction plant.
Gazprom controlled additional offshore gas resources.
An arrangement linking the two could offer advantages to both companies.
Bloomberg reported in early August that van Beurden had recently discussed possible Shell participation in Yuzhno-Kirinskoye through an asset exchange.
The report did not establish that Shell had already acquired an interest.
Indeed, the uncertainty surrounding the proposed exchange was central to the story.
The companies were still considering how the wider strategic agreement might be implemented. Royal Dutch Shell Group .com
A separate report published by New Europe on 7 August 2015, preserved in the Donovan archive, used more definite language about a proposed exchange involving Sakhalin III.
However, the formal corporate documents examined for this instalment do not establish that a completed transfer of ownership had occurred.
The safer documentary conclusion is that Shell and Gazprom were exploring possible asset arrangements, including Shell participation in Sakhalin III.
That distinction between negotiations and completed transactions must be preserved.
Contemporaneous archive source: New Europe reporting preserved on 7 August 2015
Then came the American decision.
7. Washington targets a specific offshore field
On 7 August 2015, the United States Department of Commerce published a final rule entitled:
“Russian Sanctions: Addition to the Entity List To Prevent Violations of Russian Industry Sector Sanctions.”
The issuing agency was the Bureau of Industry and Security, commonly known as BIS.
The official reference is:
Federal Register document 2015-19274.
80 FR 47402.
Effective date: 7 August 2015.
The rule added one specified Russian oil and gas field to the Entity List:
Yuzhno-Kirinskoye Field, in the Sea of Okhotsk.
This is the principal authenticated government document for the present instalment.
It establishes precisely what Washington did.
The US government concluded that exports, re-exports or transfers to the field of items subject to the Export Administration Regulations presented an unacceptable risk of supporting activities covered by Russian energy-sector restrictions.
The government therefore imposed a specific licensing requirement.
The decision was not simply an announcement of political disapproval.
It was a legally operative export-control measure.
Primary legal record: US Federal Register — Yuzhno-Kirinskoye Entity List designation, 7 August 2015
8. The unusual feature: a field rather than a company
The Entity List normally brings to mind named companies, organisations, individuals or other identifiable parties.
The August 2015 decision was unusual because the designated entry identified a particular oil and gas field.
The location was the subject of the control.
This mattered because the restrictions were directed at activities associated with developing that resource.
It was not necessary for Washington to prohibit all transactions involving Gazprom.
Nor was it necessary to shut down Sakhalin II.
The US authorities could instead restrict access to items subject to American export controls destined for a particular field.
The approach was targeted.
The government identified a location presenting a risk of supporting restricted Russian energy-development activities.
By imposing the licensing requirement at field level, it sought to prevent such items being supplied to that location without permission.
Contemporary legal analysis described the measure as unusually far-reaching.
International law firms explained that the designation would significantly complicate access to relevant technology.
The restriction applied not merely to equipment manufactured in the United States but to all items subject to the EAR, a category that can include certain foreign-made items and technology falling within US export-control jurisdiction.
The exact application depended upon the item and transaction.
It was not a worldwide prohibition on every product, person or commercial activity associated with Sakhalin III. Dechert
That distinction is important.
9. What the American rule actually prohibited
The Federal Register text is unusually explicit.
Exports, re-exports and in-country transfers of items subject to the EAR to the designated field required a BIS licence.
The rule established a presumption of denial for licence applications.
It also stated that no licence exceptions were available for the field.
This created a formidable obstacle for companies seeking to supply relevant controlled items.
However, the requirement was not legally identical to an absolute prohibition without any possibility of authorisation.
Licence applications could be made.
The government had specified that such applications would normally be denied.
That difference should be retained in any accurate account.
Nor did the rule directly prohibit all sales of LNG produced at the existing Sakhalin II plant.
It did not confiscate Shell’s shareholding in Sakhalin Energy.
It did not establish that Shell had committed an offence.
And it did not automatically terminate the June strategic cooperation agreement.
It restricted specified exports, re-exports and transfers connected with the designated field.
The potential consequences were nevertheless substantial.
Offshore gas development depends upon complex equipment and technology.
If essential equipment could not lawfully be supplied, development schedules and investment assumptions could be affected.
The US government had therefore created a legal obstacle at precisely the point where Gazprom and Shell were exploring ways to develop additional resources for their LNG ambitions. Federal Register
10. Why Washington cited oil reserves
One of the most revealing aspects of the August designation is the justification.
Yuzhno-Kirinskoye was widely discussed in commercial reporting as a gas and condensate field.
The proposed Sakhalin II expansion concerned LNG.
Yet the US government specifically referred to the field’s reported substantial oil reserves.
The distinction was legally important.
The relevant Russian energy-sector restrictions were particularly concerned with specified oil-related activities, including deepwater projects with the potential to produce oil.
The Federal Register explained that the field was being designated because of the reported oil reserves.
The government considered that providing items subject to the EAR could support restricted deepwater exploration or production activities.
The text referred to Russian deepwater locations exceeding 500 feet.
That is approximately 152 metres.
Yuzhno-Kirinskoye was an offshore development in which water depths and advanced subsea technology were relevant.
The government therefore treated the potential for oil production as sufficient to justify the broader licensing requirement at that location.
This is a significant point.
The commercial ambition concerned gas supplies for LNG.
The US export-control decision relied upon the field’s potential to support restricted oil-development activity.
The result affected access to items needed for development of a field that Gazprom regarded as important for gas production.
A gas-centred commercial project had encountered an export-control restriction justified partly by the presence of oil. Federal Register
That was the sanctions paradox.
11. Reuters: the Shell–Gazprom alliance could be in jeopardy
On 10 August 2015, Reuters published an important report by Denis Pinchuk and Katya Golubkova.
Its central conclusion was that the new US restrictions could threaten Shell’s developing strategic alliance with Gazprom.
The report examined the connection between Yuzhno-Kirinskoye and Sakhalin II expansion.
It also discussed Shell’s possible interest in acquiring an interest in Sakhalin III through an asset exchange.
Reuters quoted Alexander Kornilov, an energy analyst at Alfa Bank in Moscow.
Kornilov regarded the restrictions as potentially serious for Gazprom’s offshore development and LNG plans.
He argued that developing the field without international partners and technology would be extremely difficult.
This was an analyst’s assessment.
It was not an official finding that the project had become permanently impossible.
Nor did it establish that Shell had decided to withdraw.
Nevertheless, the assessment identified the practical commercial problem.
The June agreements contemplated further cooperation involving resources and technology.
The August restrictions made access to some of that technology substantially more difficult.
A development project could remain technically and commercially desirable while becoming harder to implement legally.
Reuters’ report is preserved in the Donovan archive.
Contemporaneous source: Reuters — US sanctions put Gazprom–Shell alliance plans in jeopardy, 10 August 2015
12. Shell responds: sanctions compliance, but no retreat
The contemporary record also preserves Shell’s response.
Bloomberg reported on 7 August 2015 that Shell had issued an emailed statement concerning the new restrictions.
Shell said it was engaging with the relevant authorities and taking steps to comply with applicable sanctions.
The company also reaffirmed its commitment to operating in Russia and maintaining its relationships with Russian partners.
Reuters subsequently reported the same general position.
This is important evidence.
Shell was not publicly rejecting the American restrictions.
It was not declaring that it would supply prohibited technology regardless of the law.
It acknowledged the need to comply.
But neither was it announcing an abandonment of Russia.
The company’s position remained consistent with its approach during 2014.
Maintain established lawful operations.
Assess the implications of new restrictions.
Preserve commercial relationships where possible.
Continue exploring permissible opportunities.
Shell’s statements therefore support a narrower conclusion than either of two competing interpretations.
They do not demonstrate defiance of sanctions.
They also do not demonstrate a decision to sever relations with Gazprom.
They demonstrate an intention to preserve the partnership while responding to the restrictions. Royal Dutch Shell Group .com
Contemporaneous archive source: Bloomberg — US puts Russian gas field off limits as sanctions tighten, 7 August 2015
13. The Russian government objects
Reuters also reported the reaction from Moscow.
Kremlin spokesman Dmitry Peskov criticised the American decision.
He argued that additional sanctions damaged relations between Russia and the United States.
Gazprom declined to comment on the designation.
The diplomatic response was predictable.
Russia regarded Western sanctions as politically motivated restrictions on its economic development.
The United States presented its measures as part of its response to Russian actions in Ukraine.
The two governments disagreed fundamentally about the justification for the restrictions.
But the legal consequences did not depend upon resolving that political dispute.
Companies dealing with items subject to US export controls had to comply with the applicable US rules.
The commercial implications extended well beyond American companies.
International energy projects involve equipment, software, services and technology from multiple jurisdictions.
A European company could encounter US export-control requirements where the relevant items or transactions fell within American jurisdiction.
The designation therefore had potential consequences for companies operating far beyond the United States. Yahoo
That included any prospective partner seeking to support development at Yuzhno-Kirinskoye using covered items.
14. The distinction between Sakhalin II and Sakhalin III
This is where the documentary record requires particular precision.
Sakhalin II and Sakhalin III were not interchangeable.
Sakhalin II was an established producing operation with a functioning LNG plant.
Its controlling shareholder was Gazprom.
Shell, Mitsui and Mitsubishi retained minority interests.
Sakhalin III was a separate development programme involving Gazprom-controlled offshore resources.
The third Sakhalin II LNG train was intended to receive additional gas from Sakhalin III.
The August 2015 designation targeted Yuzhno-Kirinskoye, a field within Sakhalin III.
It did not designate the entire Sakhalin II LNG complex.
It did not automatically prohibit existing Sakhalin II LNG exports.
Nor did it establish that every component of the proposed third train was subject to the same licensing requirements.
The significance lay in the potential dependency.
If additional LNG capacity required gas from Sakhalin III, and developing important Sakhalin III resources required technology now subject to restrictive licensing, the expansion could become more difficult.
That is the causal connection supported by the evidence.
It is a connection between proposed gas supplies, field development and export controls.
It should not be expanded into an unsupported claim that the United States had directly banned Sakhalin II’s third LNG train.
The available government record does not establish that.
15. The unresolved question of an asset swap
The June strategic agreement contemplated possible asset exchanges between Gazprom and Shell.
Reuters and other contemporary publications reported that an interest in Sakhalin III could form part of such arrangements.
That possibility had considerable commercial importance.
Shell could potentially obtain upstream exposure to additional gas resources.
Gazprom might acquire an interest in other Shell assets.
Such arrangements could strengthen the companies’ wider relationship.
But the August designation complicated the prospects.
Any transaction would have to be assessed against applicable sanctions and export-control rules.
The commercial value of an asset could also be affected if development required technology that was difficult to obtain.
It would therefore be reasonable to expect the designation to influence negotiations.
But the evidence does not establish the precise effect upon any confidential discussions.
Nor does it establish that Shell had already agreed a definitive asset exchange involving Yuzhno-Kirinskoye before the designation.
That is an important evidential limitation.
The public record supports the existence of discussions and proposals.
It does not permit us to reconstruct every negotiating position or commercial consequence.
16. The judicial context: sanctions were legally contested
The European sanctions framework was also the subject of litigation.
The most important subsequent judicial record is the Court of Justice of the European Union’s judgment of 28 March 2017 in:
PJSC Rosneft Oil Company v HM Treasury and Others, Case C-72/15.
The proceedings arose from a reference by the High Court of Justice in England and Wales.
The case concerned the validity and interpretation of EU restrictive measures introduced following Russia’s actions destabilising Ukraine.
The Court examined issues involving capital-market restrictions, financial assistance and specified oil-sector activities.
It upheld the contested EU measures against the relevant challenges.
The judgment illustrates the legal significance of precisely defining the scope of sanctions.
It also confirms that restrictions affecting Russian energy development were capable of detailed judicial examination. Publications Office of the EU
But the limits of the judgment are equally important.
Shell was not the defendant.
The proceedings did not concern the June 2015 Shell–Gazprom agreements.
The Court did not determine whether Shell’s proposed Sakhalin expansion was lawful.
And the judgment did not adjudicate the separate US Commerce Department designation of Yuzhno-Kirinskoye.
The Rosneft case is included as legal context.
It must not be presented as a judicial finding against Shell.
Judicial source: Court of Justice of the European Union — Rosneft v HM Treasury, Case C-72/15
17. The Donovan archive preserves the contemporary warnings
One of the benefits of the independent Shell archive is that it preserves the progression of reporting as events unfolded.
The relevant sequence includes:
18 June 2015: Reuters reported the Shell–Gazprom agreement concerning Sakhalin II expansion.
19 June 2015: Reuters reported Miller’s ambition to build a global strategic partnership with Shell.
7 August 2015: New Europe reported discussions about exchanging assets for an interest in Sakhalin III.
7 August 2015: The US Commerce Department imposed the Yuzhno-Kirinskoye export-control restrictions.
8 August 2015: The Donovan archive reproduced Bloomberg reporting on the restrictions and their potential consequences.
10 August 2015: The archive preserved Reuters’ examination of the danger to the Gazprom–Shell alliance.
These records are useful because they capture the issue as it was understood at the time.
They do not benefit from hindsight.
They show optimism, uncertainty and growing concern developing over a remarkably short period.
Within seven weeks of the June agreement, the strategic relationship was already encountering a serious new obstacle.
The chronology is independently supported by Gazprom’s official announcements and the US Federal Register.
The archive preserves how the development was reported and interpreted contemporaneously. Royal Dutch Shell Plc .com
Documentary Findings
Established by authenticated corporate records
On 18 June 2015, Ben van Beurden and Alexey Miller signed an Agreement of Strategic Cooperation.
The agreement contemplated expanded cooperation across the gas industry, including possible asset exchanges.
The executives also signed a memorandum advancing the proposed third LNG production train at Sakhalin II.
Gazprom publicly identified Sakhalin III as the intended source of additional gas needed to operate the proposed train at full capacity.
The June memorandum addressed further development work and preparations for a final investment decision.
It did not establish that the final investment decision had already been taken.
On the same day, Shell and other European companies signed a separate memorandum concerning additional Russian gas-export infrastructure across the Baltic Sea.
These matters are established by Gazprom’s official announcements. Gazprom
Established by the US government
On 7 August 2015, the Bureau of Industry and Security added Yuzhno-Kirinskoye to the Entity List.
The measure required a licence for exports, re-exports and in-country transfers to the field of all items subject to the EAR.
Licence applications were subject to a presumption of denial.
No licence exceptions were available for the listed field.
The government cited reported substantial oil reserves and the risk of supporting restricted deepwater Russian oil and gas activities.
The rule did not constitute a comprehensive prohibition on all commercial activity involving Shell, Gazprom or Sakhalin II.
These conclusions are established by Federal Register document 2015-19274. Federal Register
Established by contemporaneous reporting
Reuters reported that the June agreements formed part of Gazprom’s ambition to create a wider strategic partnership with Shell.
Bloomberg reported Shell’s interest in possible participation in Yuzhno-Kirinskoye through an asset exchange.
Reuters reported that the August restrictions could jeopardise those plans.
Analysts warned that the restrictions could substantially complicate development of the field and expansion of Sakhalin II.
Shell publicly stated that it would comply with applicable sanctions while maintaining its commitment to working in Russia.
These reports establish what was publicly reported and stated at the time.
They do not establish the content of every private negotiation. Business Standard
Not established
The documents do not establish that Shell violated US export-control law.
They do not establish that Shell supplied prohibited technology to Yuzhno-Kirinskoye.
They do not establish that the June 2015 agreements were themselves unlawful.
They do not establish that Shell had completed an asset exchange involving Sakhalin III.
They do not establish that the proposed third LNG train had received final construction authorisation.
They do not establish that the US restrictions automatically prohibited the operation of Sakhalin II.
They do not establish that Gazprom could no longer develop Yuzhno-Kirinskoye under any circumstances.
They do not establish that Shell endorsed Russia’s annexation of Crimea or subsequent actions in Ukraine.
And they do not establish that the August restrictions brought the Shell–Gazprom strategic relationship to an end.
The surviving records support a more precise conclusion.
The restrictions created a substantial new legal and technological obstacle to the proposed development.
Commentary: Shell’s Russian Partnership Reaches Another Turning Point
The events of June to August 2015 reveal a recurring feature of Shell’s relationship with Russia.
Commercial ambition repeatedly encountered political reality.
The history stretches back considerably further than the 2014 sanctions crisis.
In 2006, Shell had been forced into difficult negotiations over the future of Sakhalin II.
The Russian authorities applied intense regulatory pressure during a period of controversy over the project’s environmental performance and rising costs.
Gazprom subsequently acquired majority control.
Shell was reduced to a minority shareholder.
That restructuring fundamentally altered the balance of power within the project.
Yet Shell remained.
The company continued supplying technical expertise.
Sakhalin II commenced LNG exports in 2009.
And by 2013–14, Shell was once again encouraging Gazprom to expand.
By June 2015, the relationship had developed into something more ambitious.
The two companies were contemplating broader cooperation, possible asset exchanges and further LNG investment.
Shell was also participating in discussions concerning additional Russian gas-export infrastructure to Europe.
For Gazprom, this was commercially attractive.
Shell possessed global LNG expertise, international market relationships and substantial technical capabilities.
For Shell, Gazprom controlled resources that could support expansion of an already valuable investment.
But this created an obvious vulnerability.
The more dependent Shell became upon developing Gazprom-controlled resources, the more exposed it became to political and legal restrictions affecting those resources.
The August 2015 designation demonstrated that vulnerability with unusual clarity.
Washington did not need to force Shell to sell its existing Sakhalin II interest.
It did not need to prohibit every LNG shipment.
Instead, the United States restricted access to covered items destined for a specific field that could supply the proposed expansion.
The distinction was legally narrow but commercially consequential.
An operating LNG plant and a future gas-development project were different things.
Shell could continue participating in one while encountering serious restrictions affecting the other.
This was the problem confronting the company.
Shell wanted more gas for Sakhalin II.
Gazprom controlled the prospective additional resources.
Developing those resources required sophisticated technology.
Washington was restricting access to that technology.
The resulting tension was not easily resolved by corporate diplomacy.
The June agreements could express commercial commitment.
They could establish project-development procedures.
They could identify possible future transactions.
But they could not remove the legal requirements imposed by the United States.
Nor could they eliminate the risks associated with investing in Russia during an expanding international confrontation.
The documentary evidence also reveals why simplistic interpretations of Shell’s conduct are inadequate.
The company was not necessarily ignoring sanctions merely because it continued negotiating with Gazprom.
Nor was it necessarily withdrawing from Russia merely because sanctions had forced it to suspend particular activities.
The corporate record shows an attempt to preserve existing value while pursuing additional opportunities where legally permissible.
That was a commercial strategy.
Whether it was sufficiently cautious, politically responsible or ultimately beneficial to shareholders is a separate matter.
The history of Sakhalin II provides reason to examine those questions closely.
Shell had already experienced one major confrontation in which Russian political and regulatory power reshaped its investment.
It was now confronting another situation in which government decisions, this time from Washington, threatened the commercial assumptions behind a proposed expansion.
The company remained determined to maintain its Russian relationships.
But the strategic environment was increasingly difficult.
And the consequences were beginning to extend beyond Sakhalin.
For while the United States was restricting access to technology at Yuzhno-Kirinskoye, Shell and Gazprom were advancing another major project much closer to Europe’s political and economic centre.
That project would ultimately become one of the most controversial energy-infrastructure developments in modern European history.
Its name was Nord Stream 2.
Principal Documentary Sources
1. Gazprom — 18 June 2015
Gazprom and Shell sign several strategic documents.
The central authenticated corporate record for the June strategic cooperation agreement, the Sakhalin II third-train memorandum and the stated intention to use additional Sakhalin III gas.
Read Gazprom’s official 18 June announcement
2. Gazprom — 18 June 2015
Gazprom, E.ON, Shell and OMV agree upon developing gas transmission capacities to deliver Russian gas to Europe.
Official record of the separate memorandum concerning additional Baltic Sea pipeline infrastructure.
Gazprom’s European gas-transmission announcement
3. US Department of Commerce — 7 August 2015
Russian Sanctions: Addition to the Entity List To Prevent Violations of Russian Industry Sector Sanctions.
Federal Register document 2015-19274, 80 FR 47402.
The definitive legal source for the Yuzhno-Kirinskoye designation, licensing requirements, presumption of denial and absence of licence exceptions.
Read the US Federal Register rule
4. Reuters — 18 June 2015
Gazprom, Shell agree to expand Sakhalin-2 project.
Contemporaneous account preserved in the Donovan archive.
Reuters report preserved on 18 June 2015
5. Reuters — 19 June 2015
Exclusive: Gazprom building global alliance with expanded Shell.
Interview with Alexey Miller examining the proposed strategic partnership, LNG expansion, asset exchanges and European gas infrastructure.
Reuters interview with Alexey Miller
6. New Europe — 7 August 2015
Contemporaneous reporting about a possible Shell–Gazprom asset exchange involving Sakhalin III, preserved in the Donovan archive.
Read the archived New Europe report
7. Bloomberg — 7 August 2015
US Puts Russian Gas Field Off Limits as Sanctions Tighten.
Contemporaneous reporting of the American decision, prospective implications for Shell and the company’s sanctions-compliance statement.
Bloomberg report preserved in the Shell archive
8. Reuters — 10 August 2015
US Sanctions Put Gazprom–Shell Alliance Plans in Jeopardy.
Detailed contemporary assessment of the effects upon Yuzhno-Kirinskoye, Sakhalin II expansion and proposed asset exchanges.
Reuters report preserved in the Donovan archive
9. Gazprom — Sakhalin III project record
Corporate information concerning the Kirinsky block, offshore production technology and the development of the wider Sakhalin gas production centre.
10. Royal Dutch Shell plc — Annual Report and Form 20-F 2014
Filed with the United States Securities and Exchange Commission on 12 March 2015.
The authenticated Shell reporting record for its pre-existing Russian investments, operations and exposure to sanctions.
Shell’s 2014 Form 20-F filing record
11. Court of Justice of the European Union — 28 March 2017
PJSC Rosneft Oil Company v HM Treasury and Others, Case C-72/15.
Subsequent judicial examination of the EU sanctions framework. Included for legal context only.
Official EU publication of the Rosneft judgment
Archive disclaimer: This instalment distinguishes authenticated corporate announcements, US government regulations, subsequent judicial material, contemporaneous journalism and editorial interpretation.
Gazprom’s announcements establish what the company publicly reported and the scope of the documents signed. They do not disclose every private negotiation or establish that proposed transactions were completed.
The US Federal Register establishes the export-control restrictions applicable to Yuzhno-Kirinskoye from 7 August 2015. Those restrictions must not be confused with a comprehensive prohibition on all Shell operations in Russia.
No sanctions violation, unlawful technology transfer or other wrongdoing by Shell is alleged or established in the material examined.
Site-wide disclaimer also applies.
NEXT: The Baltic Agreement — Shell Joins Gazprom’s Nord Stream 2 Project as Sanctions Tighten
On 4 September 2015, less than a month after the United States imposed the Yuzhno-Kirinskoye restrictions, Ben van Beurden joined Alexey Miller and executives of four other European energy companies at the Eastern Economic Forum in Vladivostok.
There they signed an agreement concerning construction of Nord Stream 2.
The project envisaged two additional offshore gas pipelines across the Baltic Sea, providing capacity for approximately 55 billion cubic metres of Russian gas annually.
The proposed ownership structure gave Gazprom 51 per cent of the project company.
Shell was expected to hold 10 per cent, alongside other European partners.
Gazprom’s official announcement identified van Beurden as a signatory and recorded Shell’s argument that Europe’s declining domestic gas production justified additional import infrastructure.
This was a major development.
While Washington was attempting to restrict future Russian energy-development capabilities, Shell and other Western companies were advancing plans for infrastructure designed to increase Russian gas supplies to Europe.
The September agreement was a proposal for investment and construction, not evidence that the pipelines had already been built or that the proposed shareholdings ultimately took effect. Gazprom
It nevertheless marked another important expansion of Shell’s relationship with Gazprom.
And the timing raises questions that deserve close examination.
Why were major European energy companies prepared to deepen their involvement in Russian gas infrastructure during an escalating sanctions crisis?
How did Shell justify the project commercially?
What were the implications for Ukraine’s role as a transit route for Russian gas?
And how did Gazprom’s growing relationships with Western energy companies fit into the wider geopolitical confrontation?
The next Shell Leaks File — SLF-2007-085 — will examine the 4 September 2015 Nord Stream 2 agreement, the participating companies, the commercial arguments advanced by Shell and Gazprom, and the strategic implications of constructing new Russian gas-export infrastructure while Western sanctions were intensifying.
*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.
