Is The UK Government Really Doing All It Can To Disrupt The Russian Energy Market?

As the UK government continues to reassure the public and the wider world, that it is committed to disrupting Russia’s oil and gas activities, in order to weaken its economic and financial ability to continue the war in the Ukraine; would it surprise you to know that Russia is actively involved in exploration in the North Sea and paying the UK government tax on fossil fuels extracted from these projects?

The Sillimanite gas field is a cross-border offshore gas field which spans across the territorial waters of the UK and the Netherlands, in the southern North Sea. The operator of the gas field is Netherlands-based exploration and production company Wintershall Noordzee. The Sillimanite exploration is part of a joint venture between Wintershall Noordzee, Wintershall Dea, Germanys largest crude oil and natural gas producer, Gazprom International UK and Gazprom EP International - part of the Russian state-owned energy corporation.

The Sillimanite field was discovered in June 2015, while the UK and Dutch governments signed a treaty for the Sillimanite field development in July 2018. The field is located approximately 200km off the coast of Den Helder, Netherlands. The field spans across block 44/19a of the UK continental shelf and blocks D12a and D12b of the Netherlands continental shelf. The Sillimanite field produces gas from the sandstone reservoirs of the Carboniferous Age. The depth of the reservoir is approximately 3,700m below the sea level. Gas produced from the field is taken onshore in the Netherlands and processed for onward distribution in Europe.

The Sillimanite gas field has recovered 72.03% of its total recoverable reserves, with its peak production recorded in 2021. Based on economic assumptions, production will continue in the field until it reaches its economic limit in 2032.

PJSC Gazprom is a Russian majority, state-owned, multinational energy corporation, headquartered in the Lakhta Centre in Saint Petersburg, Russia. In addition to operating substantial gas pipeline systems, the company is involved in oil production, exploration, processing and storage of natural gas, and produces and exports liquified natural gas (LNG). Gazprom International UK is a UK subsidiary of PJSC Gazprom. Last year, Gazprom International UK announced profits of approximately ￡39 million from its investment in the Sillimanite field. The Russian state owns more than 50% of PJSC Gazprom. PJSC Gazprom is reported to have a 16% share of the world’s overall gas reserves and owns three quarters of all of Russia’s natural gas reserves. Over 68% of all domestic gas globally is produced by PJSC Gazprom. In the first six months of 2022, Gazprom had a record net profit of over $37 billion. In addition to this, PJSC Gazprom was the largest single contributor to the Russian budget in 2022, adding about $55 billion to Russian state finances that year.

Gazprom international UK is listed as a private company incorporated in the United Kingdom. It is a wholly owned subsidiary of Gazprom International Projects B.V., which is a company incorporated in the Netherlands. Gazprom International Projects B.V. is a member of a group of companies formed by Gazprom International Limited IILC, (formerly Gazprom EP International B.V.) Gazprom International Limited IILC is described as the ‘grandparent company’ of all the companies in the group. The group’s ultimate head is PJSC Gazprom, the Russian majority state-owned energy company. You don’t need a trail of breadcrumbs to see the link from Gazprom International UK to PJSC Gazprom in Russia.

In 2022, Gazprom International UK disclosed that it had made a ￡39 million profit from the Sillimanite field. Gazprom International UK proceeded to pay dividends of ￡35 million to its parent company in the Netherlands, Gazprom International Projects B.V. In its Annual Report and Financial Statement at Companies House, Gazprom International UK stated that the company’s principal activities related to the development of natural gas from the Sillimanite field in the North Sea. It further related that for the reporting period ending on 31 December 2022, the company made revenue of approximately ￡54 million from the Sillimanite field project. The company stated the main driver for this increased revenue in 2022 was the recovery in the price of gas prices globally. As a result of this, Gazprom International UK paid the UK and Dutch governments over ￡25 million in income tax for revenues earned.

Since the invasion of Ukraine in February 2022, the UK has issued a series of rolling sanctions and financial restrictions against Russia, to disrupt and weaken the Russian economy, and reduce its ability to fund the war in Ukraine. Specifically, the UK government attempted to target and disrupt Russia’s energy industry and Europe’s dependency on Russian energy. In February 2022, the then Foreign Secretary, Liz Truss, made a statement to the House of Commons on what the United Kingdom was doing to restrict the Russian financial sector and its ability to operate in the UK after the invasion of Ukraine. That statement included the following paragraph:

‘We will bring in a full asset freeze on all Russian banks in days, looking to coordinate with our allies. This same legislation will prevent the Russian state from raising debt here. And it will isolate all Russian companies – that’s over three million businesses – from accessing UK capital markets. Global giants like Gazprom will no longer be able to issue debt or equity in London.’

If this was the case, is the UK really doing all it could to restrict the Russian financial sector from having the freedom to operate in the UK? Is the wording of this statement deliberately vague, or focussed on debt and the value of equity? To make this simple to understand, consider the following – a Russian company, registered in the UK, which is also a subsidiary company of a majority state-owned Russian energy company, made a ￡39 million profit from a single energy project which partially operates in UK territorial waters. From its annual profit, this company then paid a parent company in the Netherlands approximately ￡35 million in a dividend payment. The parent company in the Netherlands is also a subsidiary of the majority state-owned Russian energy company, PJSC Gazprom. It is not hard to see where this money finally ended up.

More alarmingly is the fact that the income tax liability for Gazprom International UK’s energy project in the reporting period was nearly ￡25 million. Both the UK and Dutch governments received a share of this amount, divided between each government. The UK government has publicly assured the country that it will continue to introduce tough economic sanctions to restrict Russia’s ability to profit from its energy exports and to limit funds flowing into the Kremlin’s war chest. If that is the case, why are the UK government allowing Gazprom to be involved in fossil fuel exploration in UK territorial waters? Why is it allowing a UK registered company directly linked to a Russian majority state-owned energy company to bring money into the UK? Why is it allowing dividends to be paid from this UK registered company into a parent company in the Netherlands and then onwards to Moscow? Finally, why is the UK government taxing this and accepting money from a PJSC Gazprom subsidiary? This is happening, look at Gazprom International UK’s Annual Report and Financial Statements, follow the money trail and see the clear links between the Gazprom group of companies. At Companies House in the UK, there is one entity listed as having ‘significant control’ of Gazprom International UK – you’ve guessed it, PJSC Gazprom, St Petersburg, Russia.

It is reported that Gazprom still has interests in five North Sea drilling licences, all operated by Wintershall Noordzee. The UK government has sanctioned some PJSC Gazprom executives, but not the company itself. Opposition party members in the UK have publicly voiced outrage that the funds from gas exploration in UK territorial waters is clearly still ending up in the Kremlin war chest and funding the war in Ukraine. Confidence in the UK government is at an all-time low, the last decade has not been the best for the government’s record on transparency. 2020 and 2021 saw the UK government involved in multiple ethical scandals which dominated the news. Governments must be seen to act ethically and the public has a right to expect nothing other than the highest ethical standards of its elected officials. Ethical standards underpin the very workings of government, and create a culture of trust, transparency and integrity. The UK government is aware of the commercial activities of the PJSC Gazprom group in both UK territorial waters and the UK financial sector. The UK government is receiving income tax from those activities. We are also assured the government is ‘ratcheting up’ economic pressure on Russia. What the Gazprom group is currently doing is not illegal. However, there is a clear ethical dilemma here for the UK government. How can you assure the public you are committed to reducing Russia’s ability to fund the war in Ukraine, but at the same time tax Russian exploration in the North Sea? Has the UK government gone far enough to disrupt and restrict Russia’s energy industry and prevent funds flowing into the Kremlin’s war chest? Is the UK government acting ethically, with transparency and integrity? You decide…

Rob Diver

Operations Director

Praesidio Ltd