THE SHELL LEAKS FILES — 8 NOVEMBER 2026
Archive reference: SLF-2007-112
The Sakhalin Papers CII: The Other Sakhalin Dispute — How Moscow Took Control of the Island’s Oil and Gas Revenues
A 1997 agreement promised Sakhalin a substantial share of the revenues generated by its offshore resources. Twenty years later, Russia’s federal government reversed the allocation of Sakhalin II profits-tax receipts, transferring tens of billions of roubles towards Moscow. Original agreements, Russian legislation, corporate disclosures and contemporaneous reporting reveal a struggle over who would benefit from one of the world’s largest energy developments.
AN INDEPENDENT DOCUMENTARY INVESTIGATION
By the Donovan–Shell Archive
Researched and drafted with assistance from ChatGPT, using published Russian governmental and legislative documents, authenticated corporate disclosures, contemporaneous reporting and historical material preserved in the Donovan–Shell Archive.
Publication date: 8 November 2026
Collection: The Sakhalin Papers — Shell, Gazprom and Russia
Previous instalment: SLF-2007-111 — The 1994 Agreement: The Contract Behind Twenty Years of Conflict
Introduction: The dispute that did not involve Shell directly
For much of the past thirty years, the history of Sakhalin II has been presented as a confrontation between foreign oil companies and the Russian state.
Shell negotiated investment protections.
Russia challenged development expenditure.
Environmental regulators intervened.
Gazprom acquired majority control.
In 2022, President Vladimir Putin established a replacement operating structure after Shell announced its withdrawal from Russia.
These events have dominated international coverage.
But another dispute unfolded alongside them.
It concerned the distribution of Sakhalin II’s revenues between the Russian federal government and Sakhalin Oblast, the island region where the oil and gas were being developed.
The conflict had its origins in the same contractual arrangements examined in yesterday’s instalment.
On 22 June 1994, Sakhalin Energy entered into a production-sharing agreement with the Russian side, represented by both the federal government and the regional administration.
Three years later, Moscow and Sakhalin concluded a separate agreement governing how they would divide specified revenues generated by the project.
The document was dated 3 April 1997.
Its provisions were unusually detailed.
They addressed development bonuses, historical exploration expenditure, profit production, taxation, royalties and supplies of natural gas for regional needs.
One of its central provisions allocated the state’s share of profit production equally between Moscow and Sakhalin.
But the allocation of corporate profits-tax receipts was a separate matter.
By 2017, Sakhalin was receiving 75% of the relevant profits-tax revenue, with 25% going to the federal government.
Then Moscow proposed reversing those proportions.
The financial implications were substantial.
According to an investigation published by Russian business newspaper RBC on 29 September 2017, the proposed redistribution would transfer an estimated 68.4 billion roubles from the regional budget to the federal budget over three years.
The proposal subsequently became federal law.
By 2020, Sakhalin’s governor was reporting actual revenue losses substantially greater than some of the original estimates.
This episode reveals something important.
Russia’s struggle over Sakhalin II was not confined to securing control from foreign shareholders. The Russian state also had to decide how the resulting revenues would be distributed among its own authorities.
The documentary record allows that second struggle to be reconstructed.
And it illustrates why the contractual division of oil and gas production must not be confused with the distribution of tax revenues.
PART ONE: THE 1997 AGREEMENT
1. Two governments, one offshore development
The original production-sharing agreement was signed on 22 June 1994.
It covered the Piltun-Astokhskoye and Lunskoye oil and gas fields off Sakhalin Island.
The contractual Russian side included both the federal government and the regional administration.
That arrangement reflected the circumstances of the period.
Russia was emerging from the Soviet economic system.
Its regional authorities were developing new relationships with Moscow.
International investors wanted assurances that the enormous expenditure required for offshore development would be protected against unexpected legislative and fiscal changes.
The state wanted foreign technology, investment and export revenues.
Sakhalin’s regional administration had an additional interest.
The project was being developed in waters adjoining the island.
Its infrastructure, workforce and associated economic activities would affect local communities.
The regional government therefore had a direct interest in ensuring that Sakhalin received a meaningful portion of the resulting revenues.
The separate federal-regional agreement of 3 April 1997 addressed that concern.
A substantial reproduction of its text survives in the historical document collection maintained by Sakhalin Environment Watch.
The reproduced document identifies the parties as the Government of the Russian Federation and the Administration of Sakhalin Oblast.
It expressly refers to the production-sharing agreement signed in June 1994.
The agreement provides a rare opportunity to examine how the Russian authorities originally intended to distribute the financial benefits of the project.
There is an important qualification.
The published text is an archival reproduction. Its contents have not been compared in this investigation with an independently certified executed original and every subsequent amendment.
Nevertheless, several of its central provisions are consistent with later legislative and governmental records.
That makes it valuable documentary evidence, subject to appropriate authentication limits.
Principal historical document: Sakhalin Environment Watch — Agreement Between the Russian Government and Sakhalin Administration, 3 April 1997. Sakhalin Watch
2. The development bonuses: Sakhalin was allocated 60%
The 1997 agreement distinguished several categories of project revenue.
The first concerned payments associated with the commencement of development activities.
The reproduced agreement identifies two development bonuses.
The Piltun-Astokhskoye field was associated with a bonus of $15 million.
The Lunskoye field was associated with a bonus of $20 million.
The agreement allocated these payments in the following proportions:
Federal government: 40%.
Sakhalin Oblast: 60%.
The regional share was to be directed into Sakhalin’s foreign-currency fund.
The agreement also addressed the recovery of expenditure previously incurred by the Russian side in geological exploration.
The amount identified was $160 million.
Those reimbursements were to be divided equally between the federal and regional governments.
These provisions illustrate the complexity of the financial arrangements.
Different categories of revenue were subject to different distribution mechanisms.
A development bonus was not equivalent to a royalty.
Reimbursement of historical exploration expenditure was not the same as corporate profits tax.
And none of these payments was identical to the state’s subsequent entitlement to profit production.
The published agreement establishes the intended contractual allocation.
It does not, by itself, prove that every payment was subsequently made in the precise amount or at the time originally anticipated.
That would require the relevant payment records and audited accounts.
Nevertheless, the financial design is clear.
Sakhalin was intended to receive a substantial proportion of several early project revenues.
3. The central provision: dividing the state’s production equally
The most important provision appears in Section 4 of the reproduced 1997 agreement.
It concerns the Russian state’s share of marketable production and additional revenue arising under the original production-sharing agreement.
The allocation was straightforward.
The federal government was entitled to 50%.
Sakhalin Oblast was entitled to the remaining 50%.
The document provided for the division of the state’s share of marketable production at the relevant delivery point.
Each side would determine how to use its allocated share.
The agreement explained that the allocation reflected the difficult economic and financial condition of Sakhalin Oblast.
This was not merely an abstract accounting exercise.
It represented an attempt to allocate the economic benefits of offshore resources between two levels of government.
But a crucial distinction must be maintained.
The 50:50 allocation concerned the state’s share of production. It did not mean that Sakhalin received half of the entire project’s oil and gas output.
The original production-sharing agreement first determined which production was available for cost recovery and which represented profit production.
The Russian state’s entitlement was calculated under those arrangements.
The subsequent federal-regional agreement then allocated the relevant state share between Moscow and Sakhalin.
These were separate stages in the financial mechanism.
That distinction becomes essential when considering the later profits-tax dispute.
The government could change the allocation of tax receipts without necessarily changing the underlying production-sharing entitlement.
This is precisely why apparently conflicting percentages appear throughout the Sakhalin II documentary record.
PART TWO: TAXES, ROYALTIES AND REGIONAL RIGHTS
4. The original profits-tax arrangement
Section 6 of the reproduced 1997 agreement addressed profits tax and payments for the use of mineral resources.
It identified a corporate profits-tax rate of 32%.
The stated allocation was:
10 percentage points to the federal budget.
22 percentage points to the Sakhalin regional budget.
These figures represented components of the specified 32% tax rate.
They should not be confused with a division of tax receipts expressed as 10% and 22% of the total tax collected.
The document also allocated payments for the use of the relevant mineral resources.
The proportions were:
40% to the federal government.
60% to Sakhalin Oblast.
These arrangements reflected the legal and fiscal framework applicable when the original production-sharing agreement was negotiated.
But Russia’s tax and budget legislation subsequently changed.
By 2017, the operative allocation of Sakhalin II corporate profits-tax receipts was different from that recorded in the original 1997 text.
Sakhalin was then receiving 75% of the relevant receipts.
The federal government received 25%.
The historical difference should not be silently reconciled.
The 1997 agreement described the intended allocation under the original arrangements.
The 2017 figures concerned the budgetary allocation then in operation.
Establishing every legislative step between them would require a separate examination of intervening budget and tax legislation.
The available evidence is sufficient to establish that the allocation changed.
It is not sufficient to conclude that every intervening change breached the original agreement.
5. The dispute over royalties had already emerged by 2005
The tension between regional and federal interests was visible long before the major confrontation with Shell in 2006.
On 15 September 2005, the Sakhalin Regional Duma adopted a resolution proposing amendments to Russia’s Budget Code.
The proposal concerned the distribution of royalty payments under the Sakhalin I and Sakhalin II production-sharing agreements.
The regional legislature argued that changes in Russia’s tax legislation had affected how those payments were classified and distributed.
According to its explanatory memorandum, the original arrangements had been negotiated when royalties were governed by provisions of the legislation concerning mineral resources.
Subsequent reforms introduced a mineral-extraction tax.
The regional authorities argued that federal officials were treating the contractual royalty arrangements as equivalent to the newer tax.
In their view, this threatened the distribution of revenue originally anticipated when the production-sharing agreements were signed.
The regional legislature proposed amendments intended to preserve a 40:60 distribution between the federal and regional budgets.
Its explanatory memorandum also recorded that Sakhalin had granted certain regional tax concessions to support the projects.
This was an important part of the argument.
Sakhalin’s authorities maintained that the region had accepted fiscal concessions in anticipation of receiving specified future benefits.
The 2005 resolution is evidence of a formal legislative initiative.
It is not evidence that the proposed federal amendments were enacted.
Nor does the regional legislature’s assertion that the prevailing treatment was improper constitute a final judicial finding.
Nevertheless, the document establishes that Sakhalin’s authorities were actively defending their interpretation of the original financial bargain.
The dispute over who should receive Sakhalin II revenues was already underway before Gazprom acquired majority control.
Published legislative record: Sakhalin Regional Duma Resolution No. 3/1/336-4, 15 September 2005. Sakhalin Government
PART THREE: THE PROJECT BEGINS PAYING PROFIT PRODUCTION
6. March 2012: The financial arrangements reach a new stage
The previous Sakhalin Papers instalment examined the project’s unusual cost-recovery arrangements.
Under the production-sharing agreement, substantial expenditure could be recovered before the commencement of the subsequent profit-production sharing stages.
That made the treatment of development costs economically important.
In March 2012, Sakhalin Energy announced that the project had reached the stage at which the Russian side would begin receiving profit production.
On 30 March 2012, Interfax reported the operator’s announcement.
According to Sakhalin Energy, approximately $24.5 billion in project expenditure had been recovered.
That figure included capital and operating expenditure associated with the first and second development phases.
The company’s chief executive, Andrei Galaev, said profit sharing had commenced earlier than anticipated.
The operator forecast that the Russian side could receive approximately $500 million in profit production during 2012, using an assumed oil price of $100 per barrel.
That figure was a forecast, not a verified final receipt.
The important event was the transition to profit sharing.
The original contractual arrangements had become operational in a new financial sense.
For Sakhalin Oblast, the development was particularly significant.
The region’s entitlement to its share of the state’s profit production was now capable of generating continuing revenue.
The project had moved beyond the period during which much of its economic value was absorbed by recovering development expenditure.
But the regional government remained exposed to changes in the allocation of other categories of revenue.
In particular, corporate profits-tax receipts were becoming increasingly important to its budget.
Source: Interfax — Sakhalin II Recovered Costs Reach $24.5 Billion, 30 March 2012. Interfax.ru
7. Shell was still a substantial shareholder
By 2012, Sakhalin II’s ownership structure had changed dramatically from the consortium that signed the original production-sharing agreement.
Gazprom had acquired 50% plus one share in Sakhalin Energy in April 2007.
Shell’s interest had been reduced to approximately 27.5%, minus one share.
Mitsui held 12.5%.
Mitsubishi held 10%.
Shell therefore remained a substantial shareholder.
The company’s participation continued through the period when the project entered profit-production sharing.
The later dispute over Russia’s internal distribution of revenues consequently unfolded while Shell was still an investor.
But this fact must not be misunderstood.
Shell’s shareholding did not give it ownership of the regional government’s tax receipts.
Nor was the 1997 federal-regional revenue agreement an agreement negotiated solely between Shell and Sakhalin Oblast.
The 1997 document governed the relationship between two Russian public authorities.
The later fiscal redistribution was therefore a Russian budgetary decision.
It was not a redistribution undertaken by Shell.
That distinction is essential to the fairness of this investigation.
PART FOUR: MOSCOW REWRITES THE REVENUE ALLOCATION
8. September 2017: A proposal worth 68.4 billion roubles
On 29 September 2017, RBC published an investigation into proposed changes to the distribution of Sakhalin II profits-tax revenues.
The Russian government intended to amend the Budget Code.
Under the existing arrangements, 75% of the relevant profits-tax receipts went to Sakhalin Oblast.
The federal government received 25%.
The proposal reversed those proportions.
Moscow would receive 75%.
Sakhalin would retain 25%.
The financial consequences were estimated in the explanatory material accompanying the federal budget proposals.
According to RBC, the amounts to be redirected were projected as follows:
2018: 33.72 billion roubles.
2019: 17.75 billion roubles.
2020: 16.93 billion roubles.
The three-year total was approximately 68.4 billion roubles.
These were projected transfers based upon the proposed budget arrangements.
They were not audited final losses.
The Russian government argued that the additional federal revenues would support development across the Far Eastern Federal District.
That district included Sakhalin alongside other regions.
The proposal therefore involved redistributing part of the financial benefit generated by Sakhalin II beyond the island itself.
From Moscow’s perspective, the measure could be presented as a means of supporting wider regional development.
From Sakhalin’s perspective, it threatened a substantial reduction in revenue previously available to its own government.
RBC reported that the project’s profits-tax receipts accounted for approximately one-third of Sakhalin’s own-source budget revenue at the time.
That made the proposed change particularly consequential.
It was not a minor alteration to an obscure tax provision.
It affected a major revenue stream supporting regional public expenditure.
Contemporaneous investigation: RBC — Sakhalin to Transfer More Than 68 Billion Roubles to the Far East Over Three Years, 29 September 2017. РБК
9. The legal argument: changing the distribution without changing the investor’s tax
RBC’s investigation identified an important legal distinction.
The original production-sharing agreement contained provisions intended to protect the investors from adverse changes in the fiscal conditions governing their investment.
But the distribution of profits-tax receipts between Moscow and Sakhalin was a different question.
A company might continue paying the same amount of tax while the government changed which public budget received the money.
The investor’s tax obligation would remain unchanged.
The distribution between federal and regional authorities would change.
RBC reported that the Russian government considered this distinction significant.
It provided a basis for altering the budgetary allocation without necessarily changing Sakhalin Energy’s contractual tax burden.
That explanation is commercially and legally important.
It does not establish that every possible objection under the 1997 federal-regional agreement was invalid.
Nor does it conclusively resolve whether the original agreement imposed procedural obligations concerning consultation or amendment.
Those questions require examination of the complete agreements, subsequent amendments and applicable Russian law.
But the distinction between the taxpayer’s obligations and the government’s internal allocation of receipts is clear.
An investment-protection arrangement can preserve the amount a company pays without preventing the state from changing how its public authorities divide that payment.
The 2017 controversy was therefore not simply another attempt to increase Shell’s tax burden.
It was principally a struggle within Russia over the destination of revenue generated by the project.
10. November 2017: The proposal becomes federal law
The decisive primary document is Federal Law No. 345-FZ, dated 27 November 2017.
The State Duma adopted the legislation on 15 November.
The Federation Council approved it on 22 November.
The law was signed on 27 November.
Section 3 addressed the distribution of profits-tax receipts under production-sharing agreements.
It expressly distinguished Sakhalin II from other agreements concluded before Russia’s principal production-sharing legislation entered into force.
For Sakhalin II, the law established the following allocation for 2018–2020:
75% to the federal budget.
25% to the regional budget.
This was not merely a ministerial proposal.
It became enacted legislation.
The law is also important because it identified Sakhalin II specifically.
The project was not simply affected incidentally by a general adjustment to Russian fiscal arrangements.
Its profits-tax receipts were expressly subjected to a different allocation.
The formal legal record therefore confirms the central finding reported by RBC.
Moscow had altered the distribution of Sakhalin II’s profits-tax revenues.
Primary legislative source: Federal Law No. 345-FZ of 27 November 2017 — Amendments to the Russian Budget Code. ГАРАНТ.РУ
PART FIVE: SAKHALIN RESISTS
11. The regional authorities challenge the consequences
The proposal generated opposition within Sakhalin.
Regional legislators objected to the proposed reduction in revenue.
The Sakhalin authorities argued that the measure threatened the stability of the regional budget.
According to contemporaneous reporting, the region’s representatives also pursued negotiations with federal officials.
These discussions involved senior Russian government figures, including Deputy Prime Minister Yuri Trutnev and Finance Minister Anton Siluanov.
The central concern was that Sakhalin had become heavily dependent upon revenues generated by its offshore petroleum developments.
A sudden reduction could affect existing financial commitments.
The federal authorities argued that redistribution could support infrastructure and development across the wider Far East.
This created a conflict between two public-policy objectives.
One was preserving the fiscal capacity of the region hosting the project.
The other was using revenues from that project to support broader development.
Neither objective, considered in isolation, establishes improper conduct.
The dispute concerned their relative priority and the financial consequences of the redistribution.
For Sakhalin, the central problem was immediate.
Its budget could lose substantial revenue.
Any compensation depended upon further decisions by the federal government.
12. December 2017: Moscow offers to return part of the money
On 4 December 2017, Interfax reported an announcement by Deputy Prime Minister Yuri Trutnev.
The federal government was prepared to return part of the revenue redirected from Sakhalin.
But the arrangement was conditional.
The returned funding was to support approved investment and development projects.
This was materially different from leaving the original tax allocation unchanged.
Under the former arrangement, Sakhalin received its share of profits-tax receipts directly.
Under the new arrangement, a greater share went first to the federal budget.
Part of the money could subsequently return through intergovernmental transfers.
The regional government therefore faced a different financial relationship with Moscow.
Instead of retaining the full previous share as ordinary tax revenue, it would seek federal funding for specified purposes.
That distinction matters.
A direct tax allocation and a conditional transfer may produce similar expenditure in a particular year.
But they differ in administrative control, predictability and the conditions attached to the use of funds.
The federal government could therefore reduce Sakhalin’s direct share of tax receipts while continuing to finance projects on the island.
Those two actions are not contradictory.
They are different parts of the same fiscal arrangement.
Source: Interfax — Federal Government Prepared to Invest Half of Redirected Sakhalin II Revenues in Sakhalin, 4 December 2017. Interfax Russia
13. March 2018: The compensation arrangements take shape
On 12 March 2018, RBC reported a further development.
Governor Oleg Kozhemyako said Sakhalin would receive approximately 16 billion roubles in federal support connected with the redistribution.
The funding would be provided through intergovernmental transfers.
The arrangements were intended to support social infrastructure.
Federal officials described measures to finance schools, housing, transport and other projects.
The report also discussed negotiations under which the effective distribution of financial resources could become more favourable to Sakhalin.
Some contemporary statements described an intended effective 50:50 outcome.
But that did not necessarily mean the statutory profits-tax allocation had been restored to 50:50.
The distinction is crucial.
The law had established a 75:25 division in favour of Moscow.
Subsequent transfers could return part of the resulting federal receipts to Sakhalin.
The economic outcome might then resemble a different division of the revenue.
But the legal route through which the money arrived would remain different.
The 2018 announcement therefore represented a political and fiscal compromise.
It did not erase the original change in the tax-allocation mechanism.
Source: RBC — Sakhalin to Receive 16 Billion Roubles of Redirected Oil and Gas Revenues, 12 March 2018. РБК
PART SIX: WHAT THE REGION ACTUALLY REPORTED
14. February 2020: The governor provides the figures
By February 2020, the financial consequences could be examined against reported regional revenue figures.
On 2 February 2020, Sakhalin news organisation ASTV published information attributed to Governor Valery Limarenko and a Sakhalin Energy corporate publication.
The governor reported the following tax and non-tax revenues received by the regional budget from the Sakhalin II production-sharing arrangements:
2017: approximately 50 billion roubles.
2018: approximately 37 billion roubles.
2019: approximately 43 billion roubles.
For 2020, the region expected approximately 37 billion roubles.
These figures concerned overall regional tax and non-tax receipts associated with the project.
They should not be confused with profits-tax receipts alone.
The governor also identified the categories of revenue continuing to flow to the regional budget.
According to the report, they included 25% of profits-tax receipts, a share of oil royalties and 50% of the state’s profit-production entitlement.
The last figure is particularly important.
It demonstrates why the 2017 change should not be described as the federal government taking 75% of every category of Sakhalin II revenue.
The 75% allocation concerned corporate profits tax.
The state’s profit-production entitlement remained a separate revenue category.
The governor’s account therefore corroborates the distinction established by the original 1997 document.
The financial relationship was not governed by one percentage. It was governed by several distinct revenue streams.
Source: ASTV — Sakhalin Budget Expected to Receive Approximately 37 Billion Roubles from Sakhalin II in 2020, 2 February 2020. ASTV
15. Reported losses exceeded some earlier projections
The governor’s account provided another significant figure.
According to the report, Sakhalin’s losses of profits-tax revenue associated with the redistribution were:
2018: approximately 34.2 billion roubles.
2019: approximately 54.1 billion roubles.
Those figures were presented as losses arising from the change in the allocation of tax receipts.
They were not the same as the overall amount of project revenue received by the regional budget.
Nor were they necessarily net fiscal losses after taking account of all subsequent federal transfers.
Nevertheless, they demonstrated the scale of the redistribution.
The 2017 RBC investigation had reported projected additional federal receipts of approximately 33.72 billion roubles for 2018.
The governor’s subsequently reported 2018 figure was broadly comparable.
The 2019 figure was substantially greater than the original projected redistribution of 17.75 billion roubles.
That difference requires caution.
Forecasts and actual receipts depend upon production, prices, expenditure, exchange rates and the applicable accounting periods.
The available sources do not provide a complete reconciliation of the original projections and later reported losses.
It would therefore be inappropriate to attribute the difference to a particular factor without additional evidence.
But the reported figures demonstrate that the redistribution had substantial financial consequences.
16. The money returned — but under different conditions
The same 2020 reporting identified federal transfers associated with the redistribution.
The figures reported were approximately:
15.5 billion roubles for 2018.
14.7 billion roubles for 2019.
4.8 billion roubles for 2020.
The 2020 amount was discussed in the context of the current year’s arrangements and should not automatically be treated as an audited final payment.
The transfers were associated with social and economic development projects.
This is an important qualification to any account of Moscow simply removing revenues from Sakhalin.
Part of the money was returned.
The Russian federal government maintained that the wider redistribution supported development throughout the Far Eastern Federal District.
Sakhalin itself also benefited from federal development funding.
But the structure of that support was different from the previous tax allocation.
The regional government had lost a substantial portion of its direct profits-tax entitlement.
It received some compensating funding through transfers linked to approved development purposes.
The available record therefore supports a more precise conclusion than the claim that Moscow took the money and gave nothing back.
Moscow changed the allocation of tax receipts in its own favour and subsequently provided compensating transfers for regional development.
Whether the resulting arrangement was economically preferable for Sakhalin depends upon the amounts, timing, restrictions and ultimate benefits of those transfers.
The documents examined do not provide a complete audited assessment of those outcomes.
PART SEVEN: WHAT ABOUT THE ORIGINAL PROMISE?
17. Did Moscow breach the 1997 agreement?
This is the most important legal question.
The reproduced 1997 agreement stated that it would remain in force throughout the life of the original Sakhalin II production-sharing agreement.
It also contemplated amendments by agreement between the parties.
The document referred to notification and consultation if one side sought to change its terms.
These provisions appear significant.
But they cannot be interpreted in isolation.
The 1997 agreement distinguished contractual allocations of specified production and revenues from taxation governed by applicable legislation.
The later Russian Budget Code governed the distribution of corporate profits-tax receipts.
Those are related but different legal instruments.
The 2017 change altered the statutory allocation of tax revenue.
It did not necessarily alter Sakhalin Energy’s contractual obligations as a taxpayer.
Nor did it necessarily change the federal-regional division of profit production specified in the 1997 document.
Consequently, the available evidence does not establish that Federal Law No. 345-FZ breached the original production-sharing agreement.
It also does not establish that Moscow acted in breach of the separate 1997 federal-regional agreement.
Determining those questions would require a full examination of the executed agreements, amendments, relevant legislation and any subsequent judicial decisions.
No court judgment conclusively determining that the 2017 redistribution was unlawful has been identified for this investigation.
The legally defensible conclusion is narrower.
The original arrangements contemplated substantial regional participation in Sakhalin II revenues.
The federal government subsequently enacted legislation significantly reducing the region’s direct share of profits-tax receipts.
That change generated political and budgetary controversy.
A change in fiscal policy is established. A breach of contract is not.
18. Why Shell cannot be held responsible for Moscow’s redistribution
The distinction also matters when assessing Shell’s role.
Shell remained a substantial shareholder in Sakhalin Energy throughout the 2017 controversy.
The company benefited economically from its participation in the project.
But there is no evidence examined here establishing that Shell directed or improperly influenced Russia’s decision to redistribute profits-tax receipts.
The 1997 agreement was between the federal and regional Russian authorities.
The 2017 legislation was enacted by Russian governmental institutions.
Shell did not control the Russian Budget Code.
Nor is there evidence that the company received the tax revenues transferred from Sakhalin’s budget to the federal government.
Those were Russian public revenues.
This investigation therefore does not attribute responsibility for the redistribution to Shell.
The relevance of the episode to the Shell Leaks Files is historical and structural.
Shell’s project generated the revenues whose distribution became contested.
The original production-sharing agreement helped establish the financial framework.
The subsequent fiscal controversy illustrates how the economic consequences of the project extended beyond its shareholders.
It also demonstrates that Russian authorities had their own competing interests in the project.
The familiar Shell–Gazprom confrontation was only part of a more complicated financial history.
PART EIGHT: THE LONGER VIEW
19. The fiscal decision outlasted Shell’s participation
Shell’s position changed fundamentally in 2022.
Following Russia’s invasion of Ukraine, the company announced its intention to withdraw from Russian operations.
On 30 June 2022, President Putin issued Decree No. 416.
The decree established arrangements for transferring the rights and obligations of Sakhalin Energy to a new Russian operating company.
Shell declined to participate in that replacement company.
The financial consequences of its withdrawal became the subject of subsequent disputes.
Those developments have been examined in earlier Sakhalin Papers instalments.
But they did not erase the separate question of how the Russian government distributed revenues from Sakhalin II.
The project’s production-sharing arrangements continued to have fiscal consequences for Russian public authorities.
The distinction between ownership of the operator, entitlement to profit production and allocation of tax receipts remained relevant.
It also remained important to distinguish Shell’s former shareholder position from the subsequent operation of Sakhalin II under Russian control.
The project survived the departure of its former principal foreign shareholder.
The question of who received its revenues survived as well.
20. The budgetary framework remained significant in 2026
The longer-term importance of the 2017 decision can also be seen in Russia’s subsequent budget legislation.
The 2017 law expressly established the 75:25 allocation for 2018–2020.
Later legislation and budget arrangements extended the relevant treatment.
The version of Article 50 of Russia’s Budget Code available in the legal database as amended through June 2026 identifies Sakhalin II profits-tax receipts as subject to a 75% federal allocation.
This is a useful documentary checkpoint.
It demonstrates that the original three-year provision should not automatically be treated as having expired without replacement.
But an important limitation remains.
The current legislative allocation does not, by itself, establish the net financial position of Sakhalin Oblast after all transfers, subsidies and other revenue arrangements.
A statutory share of tax receipts is only one component of the wider fiscal relationship.
Similarly, the region’s financial position in 2026 cannot be inferred directly from the amounts reported in 2018 or 2019.
Commodity prices, production, operating costs, exchange rates and government expenditure decisions have changed.
The historical record therefore establishes the direction of the original redistribution and its continuing legislative significance.
It does not establish a single cumulative loss figure for the entire period from 2018 to 2026.
Legal reference: Russian Budget Code — Article 50, Version Amended Through June 2026. Sudact
EDITORIAL ANALYSIS
21. The original project created several competing beneficiaries
The Sakhalin II financial arrangements were designed to accommodate different interests.
The international investors wanted to recover substantial expenditure and obtain commercial returns.
The Russian federal government wanted revenues from the exploitation of national mineral resources.
Sakhalin’s regional authorities wanted the economic benefits associated with development in and around the island.
These interests were related.
They were not identical.
During the early years, the central economic dispute concerned the relationship between the investors and the Russian state.
The unusually generous cost-recovery arrangements attracted criticism.
The dramatic increase in construction expenditure intensified the disagreement.
Russia’s environmental regulators challenged the project.
Gazprom ultimately acquired majority control.
But once the project became operational and began generating substantial revenues, another conflict became increasingly important.
How should the Russian side divide its receipts?
The 1997 agreement had attempted to answer that question.
The subsequent budget controversy demonstrated that the answer was not politically settled.
22. The difference between receiving revenue and controlling expenditure
The distinction between direct tax receipts and compensating transfers deserves particular attention.
A regional government receiving revenue under an established tax-allocation formula has one form of financial autonomy.
A regional government receiving transfers from the central government has another.
The total amount available for expenditure may be similar.
But the conditions can differ.
Transfers may be earmarked for particular purposes.
They may require applications, approvals or co-financing.
Their availability may depend upon subsequent budgetary decisions.
Direct tax receipts are generally governed by the applicable fiscal allocation rules.
This does not mean that transfers are necessarily inferior.
Central governments can use them to finance major infrastructure and distribute resources between wealthy and less wealthy regions.
There may be legitimate reasons for doing so.
But a change from direct revenue to conditional support also changes the balance of fiscal decision-making.
That is the central institutional significance of the Sakhalin dispute.
Moscow did not simply change which account received the money.
It changed the mechanism through which part of Sakhalin’s oil and gas revenue could return to the region.
That distinction helps explain why the redistribution generated such strong regional concern.
23. The project became a source of national revenue — not merely regional wealth
There is a further historical irony.
The original 1997 document expressly referred to Sakhalin’s difficult financial circumstances.
It allocated substantial revenue shares to the region partly in recognition of that situation.
Two decades later, the project’s commercial success had made Sakhalin a relatively wealthy Russian region.
The federal government sought to direct more of its petroleum-derived tax revenue towards development elsewhere in the Far East.
From one perspective, this was a redistribution of revenue from a resource-rich region to support wider development.
From another, it reduced the direct financial benefits retained by the region hosting the project.
The documentary record supports both descriptions.
It does not establish that either consideration was the sole motive for the legislation.
What it demonstrates is how the economic consequences of a major offshore investment can change over time.
A revenue-sharing arrangement negotiated during financial crisis may become controversial once the project begins generating large receipts.
The original compromise may then face political pressure from beneficiaries whose interests have changed.
That is a recurring challenge in long-term natural-resource agreements.
24. The story complicates the usual interpretation of Sakhalin II
The familiar interpretation of Sakhalin II involves foreign companies confronting a powerful Russian state.
That history is well documented.
But the revenue-sharing dispute reveals a different dimension.
The Russian state was not a single economic actor with one set of interests.
Federal and regional authorities had their own claims.
The original agreements attempted to reconcile them.
Later legislation altered part of that settlement.
Regional politicians objected.
Moscow offered compensating funding.
The resulting arrangements reflected negotiation, statutory authority and differing fiscal priorities.
This was not a dispute Shell could resolve by selling shares to Gazprom.
Nor did Gazprom’s majority ownership eliminate the underlying question.
The project’s revenues continued to be divided through separate legal and budgetary mechanisms.
The economic consequences of Sakhalin II therefore reached beyond the relationship between investors and the Kremlin.
They extended into the structure of Russian public finance itself.
DOCUMENTARY FINDINGS
The available evidence supports the following conclusions.
First, Sakhalin Oblast was a party to the Russian side of the original production-sharing agreement signed on 22 June 1994.
Second, an agreement dated 3 April 1997 established arrangements for distributing specified Sakhalin II revenues between the Russian federal government and Sakhalin Oblast.
Third, the reproduced 1997 agreement allocated specified development bonuses 40% to the federal government and 60% to Sakhalin.
Fourth, it provided for an equal division of the Russian state’s share of marketable production and associated additional revenue.
Fifth, the agreement separately addressed profits tax, royalties, historical exploration expenditure and gas supplies for regional needs.
Sixth, Sakhalin’s regional legislature formally challenged aspects of the treatment of royalty revenues in 2005.
Seventh, Sakhalin Energy announced that profit-production sharing began in March 2012 after approximately $24.5 billion in project expenditure had been recovered.
Eighth, by September 2017 Sakhalin was receiving 75% of the relevant Sakhalin II corporate profits-tax receipts.
Ninth, the Russian federal government proposed reversing that allocation.
Tenth, contemporaneous budget estimates indicated a projected redistribution of approximately 68.4 billion roubles over 2018–2020.
Eleventh, Federal Law No. 345-FZ, dated 27 November 2017, enacted a 75% federal and 25% regional allocation for Sakhalin II profits-tax receipts during that period.
Twelfth, Russian authorities subsequently announced compensating transfers to support development projects on Sakhalin.
Thirteenth, Sakhalin’s governor later reported substantial losses of direct profits-tax revenue associated with the redistribution.
Fourteenth, the regional government’s continuing share of the state’s profit production remained distinct from the altered allocation of corporate profits-tax receipts.
Fifteenth, the 2017 fiscal change was enacted by Russian public authorities. No evidence examined here establishes that Shell directed the redistribution.
These conclusions are supported by published contractual material, legislative records, official corporate explanations and contemporaneous reporting.
They do not establish that the 2017 legislation unlawfully breached the original production-sharing agreement or the separate federal-regional agreement.
They do not establish that Shell committed wrongdoing in connection with the redistribution.
Nor do they establish the final net financial benefit or loss to Sakhalin after all federal transfers and other fiscal arrangements.
CONCLUSION: THE ISLAND THAT HELPED CREATE THE WEALTH
The Sakhalin II development began with an ambitious agreement intended to attract international investment to Russia’s offshore oil and gas resources.
The original arrangements recognised the interests of both Moscow and Sakhalin Oblast.
The 1997 federal-regional agreement attempted to translate those interests into financial entitlements.
Development bonuses would be divided.
Historical exploration expenditure would be reimbursed.
The Russian state’s share of marketable production would be allocated equally.
Taxes and royalties would follow specified arrangements.
Gas supplies for regional needs were also addressed.
The purpose was to establish a framework through which both levels of government could benefit from the development.
The project subsequently endured enormous controversy.
Its development costs increased.
Environmental disputes escalated.
Gazprom acquired control.
The liquefied natural gas plant entered operation.
And, in March 2012, Sakhalin Energy announced the beginning of profit-production sharing.
But the success of the development did not settle the question of who should receive its revenues.
By 2017, Sakhalin II had become sufficiently important to regional public finances that Moscow’s proposed redistribution threatened a substantial share of the island’s budget.
The federal government argued that the additional revenue could support development throughout the Far East.
Sakhalin’s authorities objected to the financial consequences.
Negotiations produced compensating arrangements.
But the underlying profits-tax allocation was changed through federal legislation.
The resulting history is more complicated than a simple account of money being taken from one budget and transferred to another.
The change altered the structure through which revenue was received and public expenditure controlled.
Part of the redistributed funding returned to Sakhalin.
Other funds supported wider federal objectives.
The complete net economic consequences require further audited analysis.
Yet the central historical finding is clear.
Sakhalin II generated a second struggle over resources — not between Shell and Russia, but between Moscow and the Russian region whose offshore fields made the project possible.
That struggle began long before Shell announced its withdrawal from Russia.
It continued while the company remained a substantial shareholder.
And its consequences outlasted Shell’s participation in the project.
The original production-sharing agreement attempted to create stability for international investors.
The separate 1997 agreement attempted to establish a distribution of revenues between Russian public authorities.
Neither arrangement prevented subsequent political controversy.
The history of Sakhalin II therefore illustrates two different forms of risk.
One concerns the relationship between governments and foreign investors.
The other concerns the distribution of natural-resource wealth within the state itself.
Both became central to the Sakhalin story.
The island supplied the resources. The project generated the revenues. But Moscow ultimately possessed the legislative authority to change how a substantial part of those revenues was divided.
The Sakhalin Papers continue.
PRINCIPAL DOCUMENTARY SOURCES
1. Sakhalin Environment Watch — 3 April 1997
Archival reproduction of the agreement between the Russian federal government and Sakhalin Oblast concerning the distribution of revenues arising from Sakhalin II.
The reproduced text identifies the allocation of bonuses, exploration-cost reimbursements, marketable production, royalties, taxes and gas supplies.
Its status as a complete executed agreement has not been independently certified.
Read the 3 April 1997 Agreement — Russian Original
2. Sakhalin Energy — Official Production-Sharing Agreement Explanation
The operator’s description of the original 1994 agreement, the Russian parties, the project’s fiscal arrangements and the commencement of profit-production sharing.
Sakhalin Energy — Production Sharing Agreement
3. Sakhalin Regional Duma — 15 September 2005
Resolution No. 3/1/336-4 concerning proposed changes to the Russian Budget Code.
Includes an explanatory memorandum addressing royalties under the Sakhalin I and Sakhalin II production-sharing agreements.
Regional Duma Resolution and Explanatory Memorandum
4. Interfax — 30 March 2012
Contemporaneous reporting of Sakhalin Energy’s announcement that profit-production sharing had begun after approximately $24.5 billion in expenditure had been recovered.
Interfax — Sakhalin II Recovered Expenditure Reaches $24.5 Billion
5. RBC — 29 September 2017
Investigation into the proposed redistribution of Sakhalin II profits-tax receipts, including the projected transfer of 68.4 billion roubles over three years.
RBC — Sakhalin to Transfer More Than 68 Billion Roubles to the Far East
6. Russian Federation — Federal Law No. 345-FZ, 27 November 2017
Primary legislative evidence establishing a 75% federal and 25% regional allocation of Sakhalin II profits-tax receipts for 2018–2020.
Federal Law No. 345-FZ — Published Legislative Text
7. Interfax — 4 December 2017
Reporting of Deputy Prime Minister Yuri Trutnev’s statement concerning proposed federal investment of part of the redirected revenues in Sakhalin.
Interfax — Federal Government Prepared to Return Part of Sakhalin II Revenues
8. RBC — 12 March 2018
Reporting on the compensating transfer arrangements announced by Governor Oleg Kozhemyako and federal officials.
RBC — Sakhalin to Receive 16 Billion Roubles of Redirected Revenues
9. ASTV — 2 February 2020
Reporting of Governor Valery Limarenko’s account of Sakhalin II revenues, losses associated with the redistribution and compensating federal transfers.
ASTV — Sakhalin II Revenues and the Regional Budget
10. Russian Budget Code — Article 50
Legal text, as amended through June 2026, identifying the federal allocation of Sakhalin II corporate profits-tax receipts.
Russian Budget Code — Article 50
11. Donovan–Shell Archive — 7 November 2026
The preceding instalment, examining the original production-sharing agreement, the cost-recovery mechanism and the financial arrangements governing the division of production between Sakhalin Energy and the Russian side.
The Shell Leaks Files — 7 November 2026
DOCUMENTARY DISCLAIMER
This investigation examines the distribution of revenues arising from Sakhalin II between the Russian federal government and Sakhalin Oblast.
It draws upon a published reproduction of the 1997 federal-regional agreement, regional legislative material, federal budget legislation, Sakhalin Energy’s official descriptions, contemporaneous Russian reporting and historical material preserved in the Donovan–Shell Archive.
The reproduced agreement dated 3 April 1997 has not been independently compared with an officially certified executed original or all subsequent amendments.
Its terms are therefore attributed to the surviving published document.
Where later legislation and official statements corroborate particular features, those sources are identified separately.
The investigation distinguishes the original Sakhalin II production-sharing agreement from the subsequent agreement concerning the distribution of revenues between Russian public authorities.
It also distinguishes the division of the state’s profit production from the allocation of corporate profits-tax receipts, royalties, bonuses and intergovernmental transfers.
The 1997 document’s profits-tax provisions are not treated as identical to the budgetary allocation applicable in 2017.
The intervening legal changes have not been exhaustively reconstructed.
The Sakhalin Regional Duma’s 2005 legislative initiative is identified as a proposal accompanied by the regional legislature’s legal arguments.
Its contents are not represented as a final judicial determination.
The 2017 projected redistribution of 68.4 billion roubles is identified as a forecast, not an audited final loss.
The subsequent figures reported by Governor Valery Limarenko are attributed to the published account of his statements.
They are distinguished from the original projections and from the overall receipts generated by Sakhalin II.
Compensating federal transfers are acknowledged.
No complete audited calculation of Sakhalin’s net financial gain or loss over the entire period from 2018 to 2026 has been established.
The investigation does not allege that Shell directed or improperly influenced the redistribution.
It does not allege that the company unlawfully withheld tax revenues from Sakhalin.
Nor does it conclude that Russia’s 2017 legislation breached the original production-sharing agreement or the separate federal-regional agreement.
No conclusive judicial determination establishing such a breach has been identified in the documents examined.
The discussion of fiscal autonomy and regional development is editorial analysis, not a finding of unlawful conduct by Russian public authorities.
The ownership arrangements applicable before Shell’s 2022 withdrawal are distinguished from the subsequent Russian operating structure.
Shell plc, Gazprom, former Sakhalin Energy personnel, Russian federal and regional authorities and other interested parties are invited to submit factual corrections, original documents and responses for consideration and publication.
The website’s general disclaimer also applies.
NEXT IN THE SHELL LEAKS FILES
SLF-2007-113 — THE SAKHALIN PAPERS CIII
The Sakhalin Gas Promise: What the Island Was Supposed to Receive — and Why Moscow Looked Elsewhere
The 1997 federal-regional agreement did not concern money alone.
It also contained provisions addressing natural gas supplies for Sakhalin’s domestic needs.
The document identified substantial future volumes of gas intended for regional consumption.
The projected amounts increased over time.
By 2015, the agreement contemplated annual supplies measured in billions of cubic metres.
The intention was to ensure that the island hosting the offshore development would obtain direct energy benefits.
But the subsequent arrangements became more complicated.
In September 2011, the Russian government established a mechanism for receiving part of its Sakhalin II revenue in the form of natural gas.
The gas was intended to support consumers in Russia’s Far East.
In May 2014, the government extended those arrangements.
Its published explanation disclosed an important financial consideration.
Using Sakhalin II gas for domestic supply could reduce federal budget revenues because export-market prices were substantially higher than domestic prices.
The government identified an alternative source of gas: the Kirinskoye field, associated with Gazprom’s separate Sakhalin III development.
The next investigation will examine the 1997 supply provisions, subsequent Russian government decisions and the relationship between Sakhalin II’s export-oriented business model and regional energy requirements.
What did the original agreement actually promise?
Were the proposed volumes binding obligations or conditional development objectives?
What gas was subsequently supplied?
Why did the federal government consider alternative resources?
And did the commercial success of Sakhalin II translate into the domestic energy benefits originally envisaged for the island?
The investigation will distinguish contractual commitments from forecasts, gas delivered from gas merely proposed, and government economic assessments from independently established financial outcomes.
Sakhalin II was designed to export enormous quantities of natural gas. The next file asks how much of that gas was intended to benefit the island itself — and what happened to those expectations.
The Sakhalin Papers continue.
Documentary starting point: Russian Government Order No. 795-r, 12 May 2014 — Extension of Sakhalin II Gas-Supply Arrangements
Editorial note: This instalment extends the 7 November investigation by distinguishing three financial relationships often conflated in descriptions of Sakhalin II: the division of production between the investor and the Russian side; the division of the state’s entitlement between Moscow and Sakhalin; and the subsequent statutory allocation of corporate tax receipts. The most important new primary evidence is the 1997 federal-regional agreement, the 2005 regional legislative resolution and Federal Law No. 345-FZ of 27 November 2017.
*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, the Independent Shell Archive, 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 conjured up by internet wizz, Nick Gill.
