Daily Management Review

Russia Takes Over Control Of The Sakhalin Gas Project


Russia Takes Over Control Of The Sakhalin Gas Project
With a decree seizing complete control of the Sakhalin-2 gas and oil project in Russia's far east, President Vladimir Putin has increased the stakes in an economic conflict with the West and its allies, potentially forcing out Shell and Japanese investors.
The decree, issued on Thursday, establishes a new company to assume all rights and liabilities of Sakhalin Energy Investment Co, a joint venture between Shell and two Japanese trading corporations, Mitsui and Mitsubishi. 
The five-page regulation, issued in response to Western sanctions imposed on Moscow for its invasion of Ukraine, indicates that the Kremlin will now determine whether the international partners will be allowed to stay.
Gazprom already owns a 50 per cent plus one share investment in Sakhalin-2, which produces around 4% of the world's liquefied natural gas (LNG).
The decision has the potential to upset an already tense LNG market, while Moscow has stated that it sees no reason for Sakhalin-2 deliveries to be halted. Japan imports 10% of its LNG from Russia each year, primarily through long-term contracts with Sakhalin-2. The decision also increases the dangers for Western corporations that remain 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 corporations have already left, and others have stated their intention to do so, but Putin's move complicates an already difficult procedure for those trying to leave. Moscow has been working on legislation that will allow the state to take the assets of Western corporations that opt to leave.
Shell, which has already written off the value of its Russian assets, announced its intention to exit Sakhalin-2 months ago and has been in talks with potential bidders. It stated on Friday that it was reviewing the Russian decree.
According to sources, Shell was concerned that Russia would nationalise foreign-held assets, while Putin has consistently stated that Moscow would react against the US and its allies for blocking Russian assets and imposing additional penalties.
Sakhalin-2, in which Shell owns 27.5 per cent minus one share, is one of the world's largest LNG projects, with an annual output of 12 million tonnes. Its main destinations are Japan, South Korea, China, India, and other Asian countries.
Dmitry Peskov, a Kremlin spokesman, said Russia saw no reason to cease LNG supply from Sakhalin-2 and that the future of other projects or investments would be evaluated on a case-by-case basis.
"There can be no general rule here," he said.
Japan, which relies significantly on imported energy, has stated that it will not give up its stake in Sakhalin-2, in which Mitsui has a 12.5 per cent stake and Mitsubishi has a 10 per cent stake.
On Friday, Japanese Prime Minister Fumio Kishida stated that Russia's decision would not immediately halt LNG shipments from the facility, while Japan's Industry Minister Koichi Hagiuda stated that the government did not regard the directive to be 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 reserves kept by utilities and city gas suppliers, and Hagiuda has requested alternate supplies from his counterparts in the United States and Australia, he said.
The regulation states that Gazprom retains its stake, but that others must apply to the Russian government for a holding in the new company within one month. Any request will be approved or denied by the government.
Requests for comment were not responded to by Gazprom, Sakhalin Energy, or the Russian energy ministry.
According to a Mitsubishi representative, the business is exploring how to respond to the decision with Sakhalin partners and the Japanese government. Mitsui did not respond right away.