- Putin signed a decree securing all rights on Thursday
- Five-page decree follows tightening of Western sanctions
- Relocation poses risks for western companies that are still in Russia
- Shell was already in talks to sell the Sakhalin stake
TOKYO/LONDON, July 1 (Reuters) – President Vladimir Putin has upped the ante in an economic war with the West and its allies with a decree taking full control of the Sakhalin-2 gas and oil project in Russia’s Far East, a move that could edge out Shell and Japanese investors.
The decree, signed on Thursday, creates a new company that will take over all rights and obligations of Sakhalin Energy Investment Co., in which Shell (SHEL.L) and two Japanese trading companies Mitsui and Mitsubishi hold almost 50%. Continue reading
The five-page decree, which follows Western sanctions against Moscow over its invasion of Ukraine, suggests the Kremlin will now decide whether foreign partners can stay.
State-owned Gazprom (GAZP.MM) already owns 50% plus one share in Sakhalin-2, which accounts for about 4% of world liquefied natural gas (LNG) production.
The move threatens to unsettle an already strained LNG market and increases the risks Western companies still face in Russia.
“Russia’s decree effectively expropriates foreign holdings in Sakhalin Energy Investment Company and marks a further escalation of ongoing tensions,” said Lucy Cullen, a senior analyst at consulting firm Wood Mackenzie.
Many Western firms have already packed up while others have announced they would quit, but Putin’s move adds complications to an already complex process for those looking to exit. Moscow has prepared a law, due to be passed soon, to allow the state to seize assets from Western firms that decide to leave.
Shell, which has already written down the value of all of its Russian assets, made clear months ago that it intends to exit Sakhalin-2 and has been in talks with potential buyers. She announced on Friday that she was examining the Russian decree.
Sources said Shell believed there was a risk that Russia would nationalize assets held abroad, while Putin has repeatedly said Moscow will retaliate against the United States and its allies for Russian asset freezes and other sanctions.
Sakhalin-2, in which Shell has a 27.5% interest minus one share, is one of the world’s largest LNG projects with a capacity of 12 million tons. Its cargoes mainly go to Japan, South Korea, China, India and other Asian countries.
Japan’s Mitsui has a 12.5% stake in Sakhalin-2 and Mitsubishi holds 10%.
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Japan, which is heavily dependent on imported energy, said earlier it would not give up its interest in the project.
Japanese Prime Minister Fumio Kishida said on Friday that Russia’s decision would not immediately stop LNG imports from developing, while Japan Industry Minister Koichi Hagiuda said the government does not consider the decree a requirement.
“The decree does not mean that Japan’s LNG imports will become impossible immediately, but it is necessary to take all possible measures to prepare for unforeseen circumstances,” Hagiuda told reporters.
Japan has 2-3 weeks of LNG stocks at utilities and town gas suppliers, and Hagiuda has asked its US and Australian energy peers for alternative supplies, he said.
Japan imports around 6 million tons, or 10% of its LNG, from Russia each year, mostly under a long-term Sakhalin-2 contract.
According to the decree, Gazprom will keep its stake, but other shareholders must apply to the Russian government for a stake in the new company within a month. The government will then decide whether to allow them to keep an interest.
Gazprom, Sakhalin Energy and the Russian Energy Ministry did not respond to requests for comment.
A Mitsubishi spokesman said the company is discussing with partners in Sakhalin and the Japanese government how to respond to the decree. Mitsui did not comment immediately.
Shares in Mitsui & Co (8031.T) and Mitsubishi Corp (8058.T) fell more than 5% on Friday, a much steeper decline than the broader market. Shell shares in London were largely flat.
Shell CEO Ben van Beurden told reporters on Wednesday the company was making “good progress” on 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,” he said, without giving details.
Sources told Reuters in May that Shell was in talks with an Indian consortium to sell its stake. Continue reading
Russian LNG production from projects like Sakhalin-2 is likely to suffer over time as foreign know-how and parts become unavailable, said Saul Kavonic, head of Integrated Energy and Resources Research at Credit Suisse.
“This will significantly tighten the LNG market this decade,” he said, adding that any increase in the Russian state’s involvement in LNG projects would make some buyers more cautious about buying cargo.
Reporting from Yuka Obayashi, Sakura Murakami, Ju-min Park, Kiyoshi Takenaka in Tokyo, Ron Bousso in London, Emily Chow in Kuala Lumpur, Muyu Xu in Singapore and; writing by Chang-Ran Kim and Edmund Blair; Edited by Simon Cameron-Moore and Carmel Crimmins
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