Russia takes control of Sakhalin-2 oil and gas project, increasing stakes of its economic war with the West

07/06/2022 / By Kevin Hughes

Russia has taken control of the Sakhalin-2 oil and gas project in the country’s far east. Moscow’s decision to do so could drive out the project’s three investors and raise the stakes in its economic war against the West.

A five-page decree signed June 30 by Russian President Vladimir Putin establishes a new company to gain 100 percent control of all rights and obligations of Sakhalin Energy Investment Company, reported the Epoch Times. State-run Gazprom owns 50 percent plus one shares in Sakhalin-2. Royal Dutch Shell, meanwhile, holds 27.5 percent minus one shares in the project. Mitsui and Mitsubishi are also minority shareholders.

Hailed as one of the world’s biggest liquefied natural gas (LNG) projects, Sakhalin-2 accounts for about four percent of the world’s production. It is expected to churn out 12 million tons of LNG, which will mostly head to Japan, South Korea, China, India and other Asian countries.

The decree signed by Putin, which followed sanctions the West slapped on Moscow over its invasion of Ukraine, suggested that Russia will now determine whether the foreign parties can stay. Many Western countries have already pulled out, while others have announced they would quit. (Related: Gazprom cuts off gas supply to several EU members in response to sanction threats.)

However, Shell remarked on July 1 that it was evaluating the order. The Anglo-Dutch petroleum giant had already canceled the value of its Russian assets. It also clarified that it planned to drop its stake in Sakhalin, and that it had been in talks with possible buyers.

Shell CEO Ben van Beurden later said that the company was “making good progress” in its plan to exit from the Sakhalin joint venture, but did not give details.

“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 elaborated.

Lucy Cullen, principal analyst at consultancy firm Wood Mackenzie, stated that Russia’s order “effectively expropriates foreign stakes in the Sakhalin Energy Investment Company” and marks “a further escalation in ongoing tensions.” True enough, the Kremlin had been developing a law that allows the Russian state to take assets of Western companies that decide to leave.

Dwindling LNG supply about to hit the Land of the Rising Sun

Dmitry Peskov, spokesman for the Kremlin, said Russia saw no grounds for stopping LNG deliveries from Sakhalin-2. He added that the future of other investments or projects would be decided case by case, remarking that “there can be no general rule here.”

Japan, meanwhile, said it would not give up its interests in Sakhalin-2, as it imports 10 percent of its LNG annually from Russia under a long-term contract from the facility. Mitsui holds a 12.5 percent stake in the Sakhalin-2 plant, while Mitsubishi holds 10 percent.

A Mitsubishi spokesperson said the company was discussing with its partners in Sakhalin and Tokyo about how to react to the order. Mitsui did not give a reply right away.

Japanese Prime Minister Fumio Kishida said Russia’s decision would not instantly stop LNG imports coming from Sakhalin. Meanwhile, Japanese Industry Minister Koichi Haguda said Tokyo did not consider the order a demand.

“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,” Haguida told members of the media. He added that Japan has two to three weeks of LNG stocks kept by utilities and city gas suppliers, and that he has requested officials from the U.S. and Australia for alternative energy supplies.

Credit Suisse Integrated Energy and Resources Research Director Saul Kavonic said that as foreign expertise and parts become unavailable, Russian LNG projects such as Sakhalin-2 were expected to suffer. He added that Moscow’s increased involvement will only make it more difficult for potential investors to fund these projects.

“This will tighten the LNG market materially this decade,” warned Kavonic.

Follow FuelSupply.news for more news about Russia’s LNG projects.

Watch the video below to know more about Putin’s new decree permitting Russia to take over the Sakhalin-2 LNG project.

This video is from the High Hopes channel on Brighteon.com.