Meanwhile in Russia’s Far East: Sakhalin LNG

Russia Moves for Control of Sakhalin-2 LNG, Jeopardizing Foreign Ownership Stakes

Russia is moving to further tighten its grip on the nation’s oil and natural gas supplies, issuing a decree for the country to take over the Sakhalin-2 liquefied natural gas (LNG) export project on Sakhalin Island north of Japan.

An executive order signed by Russian President Vladimir Putin to “protect the national interests” calls for establishing a Russian limited liability company to take over the rights of a partnership between Shell plc, Gazprom PJSC and Japanese trading houses Mitsui & Co. Ltd. and Mitsubishi Corp. The move could ultimately force the foreign entities out of their ownership positions.

The “ownership of the company’s property, created within the framework” of a production sharing agreement signed in 1994 “shall be transferred forthwith to the Russian Federation,” according to the executive order that was dated June 30.

Stakeholders said Friday that they were reviewing the decree. It has raised red flags in the energy sector, particularly in Japan, which relies on Russia for a significant portion of LNG imports.

“The move by Putin is certainly unnerving for Japan, but I don’t think that Moscow is trying to end all LNG deliveries to Japan, because at the end of the day, Japan pays a lot of money for Russian LNG, money that the Russian state needs,” said Yuriy Humber, CEO of the Tokyo energy consultancy Yuri Group.

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Russian leader Vladimir Putin signed a decree late Thursday to change the ownership structure of the Sakhalin-2 upstream and LNG project — a move that might squeeze out foreign shareholders Shell, Mitsui and Mitsubishi.

Many Russia watchers have expected Moscow to take nationalization steps in response to the planned exodus of investors from “unfriendly” countries and international sanctions amid the war in Ukraine.

Kremlin spokesman Dmitry Peskov suggested Friday that the Sakhalin-2 decree is not the start of a nationalization trend. “Each case will be considered individually,” he was quoted as saying.

Still, even if nationalization does not become widespread, observers do not expect Sakhalin-2 to be the only target.

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A newly set up state Russian company will take over the rights and obligations of Sakhalin Energy Investment Co., the joint venture running the Sakhalin-2 oil and gas project, Reuters reported today.

This could mean a forced exit from the project for Shell and Japan’s Mitsui and Mitsubishi, which are minority shareholders in Sakhalin Energy Investment Co.

Shell already said it would leave the project a few months ago and has since then been looking for buyers for its stake in Sakhalin-2. According to earlier reports, a sale could be made to a group of Indian companies.

Shell was already leaving with a group of India buyers set to step in.

The Japanese companies, however, have not announced intentions to leave the project. In fact, earlier this year, Japan’s economy, trade and industry minister, Koichi Hagiuda, said that the Sakhalin-1 and Sakhalin-2 projects “are essentially important for energy security because the projects allow Japan to procure supplies below the market price, especially amid current high energy prices.”

Despite its participation in Western sanctions against Russia, Japan continues to buy liquefied natural gas from Sakhalin-2. Although it has stated its intention to step up the intake from alternative sources, a complete suspension of Russian energy imports seems unlikely at this point.