- Putin signed a decree securing all rights on Thursday
- A five-page decree follows the tightening of Western sanctions
- Relocation increases the risk for Western companies that are still in Russia
- Shell was already in negotiations to sell up its Sakhalin stake
TOKYO / LONDON, July 1 (Reuters) – President Vladimir Putin has stepped up efforts 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. which could force out Shell and Japanese investors.
The decree, signed on Thursday, creates a new company that will take over all rights and obligations to Sakhalin Energy Investment Co., where Shell (SHEL.L) and two Japanese trading companies Mitsui and Mitsubishi own just under 50%. read more
The five-page decree, which follows Western sanctions imposed on Moscow over the invasion of Ukraine, indicates that the Kremlin will now decide whether its foreign partners can stay.
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State-run Gazprom (GAZP.MM) already has a 50% stake plus one in Sakhalin-2, which accounts for around 4% of the world’s liquefied natural gas (LNG) production.
The measure threatens to confuse an already tight LNG market and increases the risk faced by Western companies still in Russia.
“Russia’s decree effectively expropriates foreign holdings in Sakhalin Energy Investment Company, marking a further escalation in ongoing tensions,” said Lucy Cullen, a chief analyst at consulting firm Wood Mackenzie.
Many Western companies 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 an exit. Moscow has drafted a law, which is expected to be passed soon, to allow the state to seize assets of Western companies that decide to go.
Shell, which has already written off the value of all its Russian assets, made it clear months ago that it intended to end Sakhalin-2 and has been in talks with potential buyers. It said on Friday that it was considering the Russian decree.
Sources have said Shell believed there was a risk that Russia would nationalize foreign assets, while Putin has repeatedly said that Moscow would retaliate against the United States and its allies for freezing Russian assets and other sanctions.
Sakhalin-2, in which Shell has an ownership interest of 27.5% minus one share, is one of the world’s largest LNG projects with a production of 12 million tonnes. The cargo goes mainly to Japan, South Korea, China, India and other Asian countries.
Japanese Mitsui has a 12.5% stake in Sakhalin-2 and Mitsubishi owns 10%.
Japan, which is heavily dependent on imported energy, has previously said it will not give up its interests 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’s Industry Minister Koichi Hagiuda said the government did not consider the decree a requisition.
“The decree does not mean that Japan’s LNG import will immediately become 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 its US and Australian energy colleagues about alternative supplies, he said.
Japan imports around 6 million tonnes per year or 10% of its LNG each year from Russia, mostly under a long-term contract from Sakhalin-2.
According to the decree, Gazprom retains its stake, but other shareholders must ask the Russian government for a stake in the new company within a month. The government will then decide whether to allow a shareholding to be retained.
Gazprom, Sakhalin Energy and the Russian Ministry of Energy did not respond to requests for comment.
A spokesman for Mitsubishi said the company was discussing with partners in Sakhalin and the Japanese government how to respond to the decree. Mitsui did not immediately comment.
Shares of Mitsui & Co (8031.T) and Mitsubishi Corp (8058.T) fell more than 5% on Friday, a much steeper fall than the broader market. Shell’s shares in London were largely unchanged.
Shell CEO Ben van Beurden told reporters on Wednesday that the company is “making good progress” in its plan to exit the Sakhalin Energy joint venture.
“I can tell you that when I received an update last week, I was very pleased with where we are,” he said without giving details.
Sources had told Reuters in May that Shell was in talks with an Indian consortium to sell its stake. read more
Russian LNG production from projects such as Sakhalin-2 would likely suffer over time as foreign expertise and parts became 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 Russian government engagement LNG projects will make some buyers more cautious about buying cargo.
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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; Written by Chang-Ran Kim and Edmund Blair; Edited by Simon Cameron-Moore and Carmel Crimmins
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