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

TOKYO/LONDON, July 1 (Reuters) – President Vladimir Putin has raised the stakes in an economic war with the West and its allies by ordering him to take full control of the Sakhalin-2 gas and oil project in Russia’s east. This could compel Shell and Japanese investors.

The order, signed on Thursday, creates a new company to take over all the rights and obligations of Sakhalin Energy Investment Company in Shell. (SHEL.L) and two Japanese conglomerates, Mitsui and Mitsubishi, have less than 50%. read more

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

State-run Gazprom (GAZP.MM) Sakhalin-2, which accounts for about 4% of the world’s liquefied natural gas (LNG) production, already has a 50% and one share stake.

The move threatens to destabilize the already tight LNG market, although Moscow has said there is no reason to halt Sakhalin-2 deliveries. Japan imports 10% of LNG from Russia each year, mainly from Sakhalin-2 under a long-term contract. The move also raises the risks Western companies still face in Russia.

“Russia’s mandate effectively expropriates foreign stakes in Sakhalin Energy Investment Company, signaling a further escalation in current tensions,” said Lucy Cullen, principal analyst at consultancy Wood Mackenzie.

Many Western companies have already backed up and others have said they will leave, but Putin’s move adds complications to an already complicated process for those seeking an exit. Moscow is preparing a law, which is expected to be passed soon, that would allow the state to seize the assets of Western companies that decide to move.

Shell, which has already written down the value of its Russian assets, made it clear a few months ago that it wanted out of Sakhalin-2 and was in talks with potential buyers. It said on Friday it was evaluating the Russian order.

While Putin has repeatedly said that Moscow will retaliate against the US and its allies for freezing Russian assets and other sanctions, Shell believes there is a risk of Russia nationalizing foreign assets.

Sakhalin-2, in which Shell holds a minus 27.5% stake, is one of the world’s largest LNG projects with a production capacity of 12 million tonnes. Its cargo mainly goes to Japan, South Korea, China, India and other Asian countries.

Making preparations

Kremlin spokesman Dmitry Peskov said Russia saw no reason to stop LNG supplies from Sakhalin-2 and that the future of other projects or investments would be determined separately.

“There can be no general rule here,” he said.

Japan, which relies heavily on imported energy, has said it will not give up its interests in Sakhalin-2, in which Japan’s Mitsui holds a 12.5% ​​stake and Mitsubishi 10%.

Japanese Prime Minister Fumio Kishida said Friday that Russia’s decision would not immediately halt LNG imports from the development, while Japan’s Industry Minister Koichi Hagiuda said the government did not consider the order a demand.

“The order does not mean that Japan’s LNG imports will become impossible immediately, but it is necessary to take all possible measures to prepare for unexpected situations,” Hagiuda told reporters.

Utilities and city gas suppliers hold 2-3 weeks of LNG stocks in Japan, and Hagiuda has asked its US and Australian energy peers for alternative supplies, he said.

According to the decree, Gazprom keeps its shares, but others must ask the Russian government for shares in the new company within a 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 spokeswoman said the company was in discussions with partners in Sakhalin and the Japanese government about how to respond to the order. Mitsui did not immediately comment.

Shares in Mitsui & Co (8031.D) and Mitsubishi Corp (8058.D) It fell more than 5% on Friday. Shell’s shares soared.

Shell Chief Executive Ben van Beurten said on Wednesday that the company was “making good progress” on its plans to exit the Sagal Energy joint venture.

Sources told Reuters in May that Shell was in talks with the 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 such as Sakhalin-2 would be affected by the lack of availability of foreign expertise and parts.

“This will make the LNG market materially tighter this decade,” he said.

Yuka Obayashi, Sakura Murakami, Joo-Min Park, Kiyoshi Takenaka in Tokyo, Ron Pauso in London, Emily Chow in Kuala Lumpur, Muyu Xu in Singapore and; By Sang-Ron Kim and Edmund Blair; Editing by Simon Cameron-Moore and Carmel Crimmins

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