© Reuters. FILE PHOTO: An overview of an LNG plant operated by Sakhalin Energy on Prigorodnoye, Sakhalin island, Russia, July 15, 2021. REUTERS/Vladimir Soldatkin
By Yuka Obayashi, Emily Chow and Ron Bousso
TOKYO/LONDON (Reuters) – President Vladimir Putin upped the ante in an economic war with the West and its allies as he enacted a plan to take full control of Russia’s Far East Sakhalin-2 gas and oil project , a move that could force Shell (LON: ) and Japanese investors.
The order signed on Thursday created a new company to take over all the rights and obligations of Sakhalin Energy Investment Corp, in which Shell and two Japanese trading firms, Mitsui and Mitsubishi, hold just under 50 percent.
The five-page decree says the Kremlin will now decide whether foreign partners can stay after the West slapped sanctions on Moscow over its invasion of Ukraine.
State-run Gazprom (MCX: ) already owns a 50% plus 1 stake in Sakhalin-2, which accounts for about 4% of world liquefaction (LNG) production.
The move could disrupt an already strained LNG market, although Moscow said there was no reason to halt deliveries of Sakhalin-2. Japan imports 10 percent of its LNG from Russia annually, mainly under long-term contracts from Sakhalin-2. The move also increases the risk to Western companies still in Russia.
“The Russian decree effectively expropriated a foreign stake in Sakhalin Energy Investments, marking a further escalation of ongoing tensions,” said Lucy Cullen, chief analyst at consultancy Wood Mackenzie.
Many Western companies have already packed their bags, while others have said they will pull out, but Putin’s move adds complexity to an already complicated process for those seeking an exit. Moscow has been preparing a law, expected to be passed soon, that would allow the state to seize the assets of Western companies that decide to leave.
Shell, which has written off the value of its Russian assets, made clear its intention to exit Sakhalin-2 months ago and has been in talks with potential buyers. It said on Friday it was evaluating the Russian decree.
Shell sees the potential for Russia to nationalize foreign-held assets, the sources said, while Putin has repeatedly said Moscow will retaliate against the U.S. and its allies for freezing Russian assets and other sanctions.
Shell’s 27.5% minus 1 stake in Sakhalin-2 is one of the world’s largest LNG projects, producing 12 million tonnes. Its goods are mainly shipped to Japan, South Korea, China, India and other Asian countries.
Kremlin spokesman Dmitry Peskov said Russia saw no reason to stop deliveries of LNG from Sakhalin-2, adding that the future of other projects or investments would depend on specific circumstances.
“There can’t be general rules here,” he said.
Japan, which relies heavily on imported energy, has said it will not give up its stake in Sakhalin II, where Japan’s Mitsui holds a 12.5 percent stake and Mitsubishi holds a 10 percent stake.
Japanese Prime Minister Fumio Kishida said on Friday that Russia’s decision would not immediately stop imports of LNG from the development, while Industry Minister Koichi Hagida said the government did not consider the decree an expropriation.
“The decree does not mean that Japan’s LNG imports will immediately become impossible, but it is necessary to take all possible measures to prepare for the unforeseen,” Hagida told reporters.
Japanese utilities and city gas suppliers hold 2-3 weeks’ worth of LNG inventories, and Hagiuda has turned to energy peers in the U.S. and Australia for alternative supplies, he said.
Under the decree, Gazprom retains its shares, but others must apply to the Russian government for shares in the new company within a month. The government will decide whether to grant any request.
Gazprom, Sakhalin Energy and the Russian Energy Ministry did not respond to requests for comment.
A Mitsubishi spokesman said the company was discussing with its Sakhalin partner and the Japanese government how to respond to the decree. Mitsui had no immediate comment.
Shares in Mitsui & Co and Mitsubishi Corporation fell more than 5 percent on Friday. Shell shares edged higher.
Shell Chief Executive Ben van Beurden said on Wednesday the company was “making good progress” in its plans to exit the Sakhalin energy joint venture, without providing details.
Sources told Reuters in May that Shell was in talks with an Indian consortium to sell its stake.
Saul Kavonic, head of integrated energy and resources research at Credit Suisse, said LNG production in Russia from projects such as Sakhalin-2 could be affected due to the lack of access to foreign expertise and components.
“This will significantly tighten the LNG market over the course of this decade,” he said.