Russia seizes control of

Sakhalin gas project, raises

stakes with West


1/3

Russia seizes control of Sakhalin gas project,

raises stakes with West
FILE PHOTO: FILE PHOTO: A general view shows the Sakhalin-2 project's
liquefaction gas plant in Prigorodnoye

2/3

Russia seizes control of Sakhalin gas project,

raises stakes with West
FILE PHOTO: FILE PHOTO: An employee of Sakhalin Energy stands at the
Sakhalin-2 project's liquefaction gas plant in Prigorodnoye

3/3

Russia seizes control of Sakhalin gas project,

raises stakes with West
A general view of the liquefied natural gas plant operated by Sakhalin
Energy at Prigorodnoye on the Pacific island of Sakhalin

Yuka Obayashi, Emily Chow and Ron Bousso

Fri, July 1, 2022, 4:14 AM

By Yuka Obayashi, Emily Chow and Ron Bousso

TOKYO/LONDON (Reuters) - 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 order, signed on Thursday, creates a new firm to take over all
rights and obligations of Sakhalin Energy Investment Co, in which
Shell and two Japanese trading companies Mitsui and Mitsubishi
hold just under 50%.
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% plus one share stake in
Sakhalin-2, which accounts for about 4% of the world's liquefied
natural gas (LNG) production.
The move threatens to unsettle an already tight LNG market,
although Moscow said it saw no reason for Sakhalin-2 deliveries to
stop. Japan imports 10% of its LNG each year from Russia, mainly
under long-term contract from Sakhalin-2. The action also 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 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% 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.
MAKING PREPARATIONS
Kremlin spokesman Dmitry Peskov said Russia saw no grounds for
halting LNG deliveries from Sakhalin-2 and said the future of other
projects or investments would be determined case by case.
"There can be no general rule here," he said.
Japan, which depends heavily on imported energy, has said it would
not give up its interests in Sakhalin-2, in which Japan's Mitsui has a
12.5% stake and Mitsubishi holds 10%.
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 U.S. and Australian energy
counterparts for alternative supplies, he said.
According to the decree, Gazprom keeps its stake but others must
ask the Russian government for a stake in the new firm within one
month. The government will decide whether to approve any request.
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% on
Friday. Shell's shares edged higher.
Shell Chief Executive Ben van Beurden said on Wednesday the
company was "making good progress" in its plan to exit from the
Sakhalin Energy joint venture 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 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.
(Reporting by 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; Editing by Simon Cameron-Moore and
Carmel Crimmins)

Russia moves to take

control of Sakhalin-2 oil and
gas project
Fri, July 1, 2022, 7:59 PM

The Sakhalin-2 project supplies about 4% of the global liquefied natural gas market
Russia has moved to take over a major oil and gas project in which
Shell has a 27.5% stake.
Russian President Vladimir Putin signed a decree on Thursday to
take charge of the Sakhalin-2 project.
The move could force Shell and Japan's Mitsui and Mitsubishi to
abandon their investments as the economic fallout of the Ukraine
war spreads.
Oil giant Shell said: "We are aware of the decree and are assessing
its implications."
The decree said a new firm would take over all rights and obligations
of Sakhalin Energy Investment.
Shell said in February that it would sell its Russian investments due
to the conflict in Ukraine, including the flagship Sakhalin 2 facility in
Russia's far east.
It said in April it would take a £3.8bn hit by leaving Russia.
The project, which supplies about 4% of the world's current liquefied
natural gas (LNG) market, is 50% owned and operated by Gazprom.
According to the decree, Gazprom will keep 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
stake.
Shell has been in talks with potential buyers for its stake in the
project, including some from China and India, according to previous
reports by The Daily Telegraph and Reuters.
The firm's chief executive Ben van Beurden said on Wednesday
Shell was "making good progress" in its plan to exit the joint venture.
"I cannot tell you exactly where we are because it's a commercial
process so I have to respect confidentiality, but I can tell you when I
got an update last week, I was really pleased with where we are," he
said.

Analysis box by Theo Leggett, business correspondent

This appears to be a deeply political move. The impact is likely to be
felt most keenly in Japan, which has been heavily involved in
sanctions against Russia.
Three foreign companies hold significant stakes in Sakhalin-2 -
Shell, Mitsui and Mitsubishi.
But Shell has already written off the value of its Russian assets, and
said it will exit the country.
Japan, meanwhile, is heavily reliant on imports of liquid natural gas.
Competition for shipments globally is currently intense - and the
Sakhalin project alone currently meets about 8% of its needs.
So the prospect of Russia potentially appropriating Japanese
interests in the project is certain to generate a queasy response in
Tokyo - although ministers there insist it will not make imports
"immediately impossible".
If Russian supplies to Japan are cut off, it will have to find new
sources elsewhere - increasing competition for available supplies.
That could push up prices globally, at a time when rising energy
costs are already fuelling inflation.
Japan measures

The five-page decree, which comes amid Western sanctions on

Moscow over the invasion of Ukraine, says that it is up to the
Kremlin to decide whether foreign shareholders should to remain in
the consortium.
Japan has previously said it would not give up its interests in the
Sakhalin-2 project, which is important for its energy security, even if
asked to leave.
Shares in Mitsui and Mitsubishi fell 6% in trading on Friday on
concerns about losses, with the broader Nikkei index dropping 1.9%.
A Mitsubishi spokesperson said the company was in discussions
with its partners in Sakhalin Energy and the Japanese government
about how to respond to Putin's decree.
Mitsui did not immediately respond to a request from the BBC for
comment, but told Nikkei Asia it was "in the process of confirming
the facts".
Mitsui has a 12.5% stake in the project and Mitsubishi 10%, while
Shell holds 27.5%, minus one share. Russian gas giant Gazprom
has 50%, plus one share.
Japan, South Korea and China are the main customers for oil and
LNG exports, according to Shell.
Japanese deputy chief cabinet secretary Seiji Kihara said the
country's government was examining the decree's contents and
analysing Moscow's intentions.
"Generally speaking, our country's interests in resources should not
be hurt," he told a regular news conference, declining to say whether
Japan was in contact with Moscow over the matter.
Japanese 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," he said.
Gas squeeze
Saul Kavonic, head of Integrated Energy and Resources Research
at Credit Suisse, said Russian LNG production from projects like
Sakhalin-2 was likely to suffer over time as foreign expertise and
parts became unavailable.
"This will tighten the LNG market materially this decade," he said.
Any increase in Russian government involvement will only make
procurement from these projects more difficult for many buyers, he
said.
Japan was urgently seeking alternative supply options, he added.

Putin orders Sakhalin

Energy to be transferred to a
new Russian company,
potentially pushing out
foreign partners
Putin orders Sakhalin Energy to be transferred to a new Russian company, potentially pushing
out foreign partners
Barbara Kollmeyer
Fri, July 1, 2022, 8:17 AM

A reported Russian decree could push foreign entities out of

Sakhalin-2, leaving Japan in particular in a precarious position for
natural gas supplies.