Russia controls the Sakhalin gas project and raises risks with the West

TOKYO/LONDON (Reuters) – President Vladimir Putin raised the stakes in an economic war with the West and its allies with a decree imposing full control of the Sakhalin 2 gas and oil project in Russia’s Far East, in a move. Shell and Japanese investors could be forced out.

The decree, which was signed on Thursday, creates a new company that will take over all rights and obligations of the Sakhalin Energy Investment Company, through which Shell. (coincidence) And two Japanese trading companies, Mitsui and Mitsubishi, own just under 50%. Read more

The five-page decree, which follows Western sanctions imposed on Moscow over its invasion of Ukraine, indicates that the Kremlin will now decide whether foreign partners can stay.

State-run Gazprom (GAZP.MM) It already owns 50% plus one stake in Sakhalin-2, which represents about 4% of the world’s production of liquefied natural gas (LNG).

The move threatens to destabilize the already tight LNG market and increases risks for Western companies still in Russia.

“The Russian decree effectively expropriates foreign stakes in Sakhalin Investment Energy, marking a further escalation in ongoing tensions,” said Lucy Cullen, principal analyst at consultancy Wood Mackenzie.

Many Western companies have already brought together, while others have said they will resign, but Putin’s move adds complications to an already complex process for those looking to exit. Moscow is preparing a law, expected to pass soon, to allow the state to confiscate the assets of Western companies that have decided to leave.

Shell, which has already written off the value of all its Russian assets, indicated months ago that it intended to withdraw from Sakhalin 2 and was in talks with potential buyers. On Friday, it said it was studying the Russian decree.

Sources said Shell believes there is a risk that Russia will nationalize foreign-owned assets, while Putin has repeatedly said Moscow will respond to the United States and its allies with a freeze on Russian assets and other sanctions.

Sakhalin-2, in which Shell owns 27.5% minus one stake, is one of the world’s largest LNG projects with production of 12 million tons. Its shipments are mainly directed to Japan, South Korea, China, India and other Asian countries.

Japan’s Mitsui Corporation owns a 12.5% ​​stake in Sakhalin-2, while Mitsubishi owns 10%.

chasing alternatives

Japan, which relies heavily on imported energy, said earlier that it would not give up its interests in the project.

Japanese Prime Minister Fumio Kishida said on Friday that Russia’s decision would not immediately stop LNG imports from developing, while Japanese Industry Minister Koichi Hagiuda said the government did not consider the decree as a request.

“The decree does not mean that Japan’s imports of liquefied natural gas will become impossible immediately, but it is necessary to take all possible measures to prepare for unforeseen circumstances,” Hagiuda told reporters.

He said Japan has two to three weeks of LNG stockpiles with utilities and city gas suppliers, and Hagiuda has asked counterparts in the United States and Australia for alternative supplies.

Japan imports about 6 million tons per year or 10% of LNG each year from Russia, mostly under a long-term contract from Sakhalin-2.

According to the decree, Gazprom retains its stake, but other shareholders must demand a stake in the new company from the Russian government within a month. The government will then decide whether to allow them to hold a share of the stock.

Gazprom, Sakhalin Energy and the Russian Energy Ministry did not respond to requests for comment.

A Mitsubishi spokesperson said the company was discussing with partners in Sakhalin and the Japanese government how to respond to the decree. Mitsui did not immediately comment.

Shares in Mitsui & Co (8031.T) and Mitsubishi (8058.T) It fell more than 5% on Friday, a sharper drop than the broader market. Shell shares in London remained broadly unchanged.

Shell CEO Ben van Beurden told reporters on Wednesday the company was “making good progress” with its plan to exit the Sakhalin Energy joint venture.

“I can tell you when I got an update last week, I was really happy with where we are now,” he said, without going into details.

Sources told Reuters in May that Shell was in talks with an Indian consortium to sell its stake. Read more

Saul Kavonic, head of integrated energy and resources research at Credit Suisse, said Russian LNG production from projects like Sakhalin-2 was likely to be damaged over time as foreign expertise and spare parts became unavailable.

“This will materially tighten the LNG market this decade,” he said, adding that any increase in Russian state involvement in LNG projects would make some buyers more wary of buying cargo.

Additional reporting by Yuka Obayashi, Sakura Murakami, Go Min Park and Kiyoshi Takenaka in Tokyo, Ron Boso in London, Emily Chow in Kuala Lumpur, Moyo Chuo in Singapore; Writing by Chang Ran Kim and Edmund Blair; Editing by Simon Cameron Moore and Carmel Crimmens

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