- Putin signed a decree guaranteeing all rights on Thursday
- The five-page decree follows the tightening of Western sanctions
- The move raises the risks for Western firms still in Russia
- Shell was already negotiating the sale of the Sakhalin stake
TOKYO/LONDON, July 1 (Reuters) – President Vladimir Putin raised the stakes in the economic war with the West and its allies with a decree that seized full control of the Sakhalin-2 gas and oil project in Russia’s Far East, a move that could push Shell and Japanese investors.
The decree signed on Thursday creates a new firm to take over all the rights and obligations of Sakhalin Energy Investment Co, in which Shell ( SHEL.L ) and two Japanese trading companies Mitsui and Mitsubishi own just under 50 percent. Read more
The five-page decree, which follows Western sanctions imposed on Moscow over its incursion into Ukraine, shows the Kremlin will now decide whether foreign partners can stay.
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State-owned Gazprom ( GAZP.MM ) already has a 50 percent stake plus one share in Sakhalin-2, which accounts for about 4 percent of global liquefied natural gas (LNG) production.
The move threatens to upset the already tight LNG market and raises the risks for Western companies still in Russia.
“Russia’s decree effectively expropriates foreign stakes in Sakhalin Energy Investment Company, marking a further escalation of ongoing tensions,” said Lucy Cullen, principal analyst at consultancy Wood Mackenzie.
Many Western firms have already packed up, while others have said they will leave, but Putin’s move adds complications to an already complicated process for those looking for an exit. Moscow is preparing a law expected to be passed soon to allow the state to seize assets of Western firms that decide to leave.
Shell, which has already written down the value of all its Russian assets, made it clear months ago that it intended to exit Sakhalin-2 and was in talks with potential buyers. On Friday, he said he was evaluating the Russian decree.
Sources said Shell believed there was a risk Russia would nationalize foreign assets, while Putin has repeatedly said Moscow would retaliate against the United States and its allies for Russian asset freezes and other sanctions.
Sakhalin-2, in which Shell has a 27.5% minus one share, is one of the world’s largest LNG projects with a production of 12 million tonnes. Its cargoes are mainly destined for Japan, South Korea, China, India and other Asian countries.
Japan’s Mitsui has a 12.5% stake in Sakhalin-2, and Mitsubishi holds 10%.
CHASING ALTERNATIVES
Japan, which is heavily dependent on energy imports, previously said it would not give up its interests in the project.
Japanese Prime Minister Fumio Kishida said on Friday that Russia’s decision would not immediately stop imports of liquefied natural gas from the development, while Japanese Industry Minister Koichi Hagiuda said the government did not consider the decree a requisition.
“The decree does not mean that importing liquefied natural gas from Japan will become impossible immediately, 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 energy partners in the US and Australia for alternative supplies, he said.
Japan imports about 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 them to retain an equity stake.
Gazprom, Sakhalin Energy and the Russian Energy Ministry did not respond to requests for comment.
A Mitsubishi spokesman 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 percent on Friday, much steeper declines than the broader market. Shell shares in London were broadly flat.
Shell CEO Ben van Buurden told reporters on Wednesday that the company was “making good progress” on its exit plan from the Sakhalin Energy joint venture.
“I can tell you when I got the update last week, I was really happy with where we are,” he said, without elaborating.
Sources told Reuters in May that Shell was in talks with an Indian consortium to sell its stake. Read more
Russian LNG production from projects like Sakhalin-2 is likely to suffer over time as foreign expertise and parts become unavailable, said Saul Kavonik, head of integrated energy and resources research at Credit Suisse.
“This will tighten the LNG market significantly this decade,” he said, adding that any increase in Russian state involvement in LNG projects would make some buyers more cautious about buying cargoes.
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Reporting by Yuka Obayashi, Sakura Murakami, Ju-min Park, Kiyoshi Takenaka in Tokyo, Ron Busso in London, Emily Chow in Kuala Lumpur, Muyu Xu in Singapore and; Written by Chang-Ran Kim and Edmund Blair; Editing by Simon Cameron-Moore and Carmel Crimmins
Our standards: The Thomson Reuters Trust Principles.
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