Russia seizes control of Sakhalin gas project, raises stakes with West

TOKYO/LONDON, July 1 (Reuters) – President Vladimir Putin has raised the stakes in an economic war with the West and its allies with a decree that seizes full control of the Sakhalin-2 gas and oil project in Russia’s far east, a move that could force out Shell and Japanese investors.

The order, signed on Thursday, creates a new firm to take over all rights and obligations of Sakhalin Energy Investment Co, in which Shell (SHEL.L) and two Japanese trading companies Mitsui and Mitsubishi hold just under 50%. read more

The five-page decree, which follows Western sanctions imposed on Moscow over its invasion of Ukraine, indicates the Kremlin will now decide whether the foreign partners can stay.

State-run Gazprom (GAZP.MM) already has a 50% plus one share stake in Sakhalin-2, which accounts for about 4% of the world’s liquefied natural gas (LNG) production.

The move threatens to unsettle an already tight LNG market, although Moscow said it saw no reason for Sakhalin-2 deliveries to stop. Japan imports 10% of its LNG each year from Russia, mainly under long-term contract from Sakhalin-2. The action also raises the risks facing Western companies still in Russia.

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

Many Western firms 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 the exit. Moscow has been preparing a law, expected to pass soon, to allow the state to seize assets of Western firms which decide to go.

Shell, which has already written off the value of its Russian assets, made clear months ago it intended to quit Sakhalin-2 and has been in talks with potential buyers. It said on Friday it was assessing the Russian decree.

Sources have said Shell believed there was a risk Russia would nationalise foreign-held assets, while Putin has repeatedly said Moscow would retaliate against the United States and its allies for freezing Russian assets and other sanctions.

Sakhalin-2, in which Shell has a 27.5% minus one share stake, is one of the world’s largest LNG projects with output of 12 million tonnes. Its cargoes mainly head to Japan, South Korea, China, India and other Asian countries.

MAKING PREPARATIONS

Kremlin spokesman Dmitry Peskov said Russia saw no grounds for halting LNG deliveries from Sakhalin-2 and said the future of other projects or investments would be determined case by case.

“There can be no general rule here,” he said.

Japan, which depends heavily on imported energy, has said it would not give up its interests in Sakhalin-2, in which Japan’s Mitsui has a 12.5% stake and Mitsubishi holds 10%.

Japanese Prime Minister Fumio Kishida said on Friday that Russia’s decision would not immediately stop LNG…