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Russia seizes control of Sakhalin gas project, raises stakes with West

Russia seizes control of Sakhalin gas project, raises stakes with West

An employee of Sakhalin Energy stands at the Sakhalin-2 project's liquefaction gas plant in Prigorodnoye, about 70km south of Yuzhno-Sakhalinsk, Oct 13, 2006. (File photo: REUTERS/Sergei Karpukhin)

TOKYO: President Vladimir Putin has raised the stakes in an economic war with the West and its allies with a decree that seizes full control of the Sakhalin-2 gas and oil project in Russia's far east, a move that could force out Shell and Japanese investors.

The decree, signed on Thursday (Jun 30), creates a new firm to take over all rights and obligations of Sakhalin Energy Investment, in which Shell and two Japanese trading companies Mitsui and Mitsubishi hold just under 50 per cent.

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

State-run Gazprom already has a 50 per cent plus one share stake in Sakhalin-2, which accounts for about 4 per cent of the world's liquefied natural gas (LNG) production.

The move threatens to unsettle an already tight LNG market and raises the risks facing Western companies still in Russia.

"Russia’s decree effectively expropriates foreign stakes in the Sakhalin Energy Investment Company, marking a further escalation in ongoing tensions," said Lucy Cullen, a principal analyst from consultancy Wood Mackenzie.

Many Western firms have already packed up, while others have said they would quit, but Putin's move adds complications to an already complex process for those looking for the exit. Moscow has been preparing a law, expected to pass soon, to allow the state to seize assets of Western firms which decide to go.

Shell, which has already written off the value of all its Russian assets, made clear months ago it intended to quit Sakhalin-2 and has been in talks with potential buyers. It said on Friday it was assessing the Russian decree.

Sources have said Shell believed there was a risk Russia would nationalise foreign-held assets, while Putin has repeatedly said Moscow would retaliate against the United States and its allies for freezing Russian assets and other sanctions.

Sakhalin-2, in which Shell has a 27.5 per cent minus one share stake, is one of the world's largest LNG projects with output of 12 million tonnes. Its cargoes mainly head to Japan, South Korea, China, India and other Asian countries.

Japan's Mitsui has a 12.5 per cent stake in Sakhalin-2 and Mitsubishi holds 10 per cent.


Japan, which depends heavily on imported energy, previously said 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 the development, while Japan's Industry Minister Koichi Hagiuda said the government did not consider the decree a requisition.

"The decree does not mean that Japan's LNG imports will become immediately impossible, but it is necessary to take all possible measures in preparation for unforeseen circumstances," Hagiuda told reporters.

Japan has 2-3 weeks of LNG stocks held by utilities and city gas suppliers and Hagiuda has asked his US and Australian energy counterparts for alternative supplies, he said.

Japan imports around 6 million tonnes per year or 10 per cent of its LNG each year from Russia, mostly under long-term contract from Sakhalin-2.

According to the decree, Gazprom keeps its stake but other shareholders must ask the Russian government for a stake in the new firm within one month. The government will then decide whether to allow them to keep a shareholding.

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 Japan's government about how to respond to the decree. Mitsui did not comment immediately.

Shares in Mitsui & Co and Mitsubishi Corp slid more than 5 per cent on Friday, a much steeper fall than the broader market. Shell's shares in London were broadly unchanged.

Shell Chief Executive Ben van Beurden told reporters on Wednesday the company was "making good progress" in its plan to exit from the Sakhalin Energy joint venture.

"I can tell you when I got an update last week, I was really pleased with where we are," he said, without giving details.

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

Russian LNG production from projects such as Sakhalin-2 was likely to suffer over time as foreign expertise and parts became unavailable, said Saul Kavonic, head of Integrated Energy and Resources Research at Credit Suisse.

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

Source: Reuters/ic


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