Putin Seizes Full Control Of Sakhalin Gas Project; Shell Not Suprised

With a decree seizing complete control of the Sakhalin-2 gas and oil project in Russia's far east, Russian President Vladimir Putin has increased the stakes in an economic conflict with the West and its allies, potentially forcing out Shell and Japanese partners, Yuka Obayashi, Emily Chow, and Ron Bousso reported for Reuters.

Photo Insert: The decree, which was signed on Thursday, establishes a new company to assume full ownership of Sakhalin Energy Investment Co, a company in which Shell and two Japanese trading companies Mitsui and Mitsubishi hold slightly under 50% of the shares.

The decree, which was signed on Thursday, establishes a new company to assume full ownership of Sakhalin Energy Investment Co, a company in which Shell and two Japanese trading companies Mitsui and Mitsubishi hold slightly under 50% of the shares.

Since announcing its intention to leave Sakhalin-2 months ago, Shell, which has already written off the value of its Russian assets, has been in contact with prospective bidders. It stated that it was evaluating the Russian decision on Friday.

According to sources, Shell was concerned that Russia might seize foreign-owned assets, especially in light of Putin's repeated threats to retaliate against the United States and its allies for the freezing of Russian assets and other penalties.

One of the biggest LNG projects in the world, Sakhalin-2, which Shell owns a 27.5 percent minus one shareholding in, will produce 12 million tonnes of LNG annually. Its shipments are mostly made for Asian nations like Japan, South Korea, China, and India.

The five-page order, which comes after Moscow was sanctioned by the West for its invasion of Ukraine, indicates that the Kremlin will now decide whether the foreign partners can stay. Sakhalin-2, which produces 4% of the world's liquefied natural gas (LNG), is already owned by state-run Gazprom to the tune of 50% plus one share.

Although Moscow stated it saw no reason for Sakhalin-2 deliveries to cease, the move raises concerns about the stability of the already constrained LNG market.

"Russia's decree effectively expropriates foreign stakes in the Sakhalin Energy Investment Co., marking a further escalation in ongoing tensions," said Lucy Cullen, a principal analyst from consultancy Wood Mackenzie.

Many Western firms have already left, and others have stated their intention to do so, but Putin's move complicates an already difficult procedure for those trying to leave. Moscow has been working on legislation that will allow the state to take the assets of Western corporations that opt to leave.

Dmitry Peskov, a Kremlin spokesman, said Russia saw no reason to cease LNG supply from Sakhalin-2 and that the future of other projects or investments would be evaluated on a case-by-case basis. "There can be no general rule here," he remarked.

Japan, which relies significantly on imported energy, has stated that it will not give up its stake in Sakhalin-2, in which Mitsui has a 12.5 percent stake and Mitsubishi has a 10% stake. 10% of Japan's annual LNG imports come from Russia, primarily under long-term contracts with Sakhalin-2.

The incident also highlights the dangers Western businesses operating in Russia still face.

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