Russia is set to take over a major natural gas joint venture, jeopardizing investments by Shell and two Japanese energy trading companies in the seizure of a major foreign investment.
A decree issued Thursday by President Vladimir V. Putin concerns Sakhalin-2, a project in the Russian Far East that is a key exporter of liquefied natural gas to Japan. The Kremlin’s decision has raised concerns in Japan about the future of such shipments.
Gazprom, the Russian natural gas monopoly, has a 50% majority stake in Sakhalin-2, followed by Shell, the European oil giant, with 27.5%, and Mitsui and Mitsubishi, two energy companies based in Japan with shares. totaling 22.5%.
The decree stipulates that a new company will take over Sakhalin-2 and that the three foreign investors have one month to ask the Russian government to retain their stake in the new company.
Shell previously announced its intention to withdraw from the business as part of its efforts to withdraw from Russia due to the invasion of Ukraine.
On Friday, Shell said it was “assessing” the implications of Russia’s decision, but declined to comment further. Shell has already written off $1.6 billion worth of Sakhalin-2.
Mr Putin’s move is the first time he has taken over an international oil project since invading Ukraine in February. During its two decades in power, however, the Russian government has played hardball with foreign oil and gas companies. Essentially, Mr. Putin and the Russian oil industry wanted Western companies to bring in capital and technology, but Russian entities to retain control.
Shell paved the way for the development of Sakhalin-2, which is based on the Pacific island of Sakhalin and was Russia’s first liquefied natural gas facility, sending its first cargo to Japan in 2009. It gave the country a foothold in fast-growing fuel, which is cooled to a liquid state so it can be transported on ships.
Construction of the project was tricky as the location was remote and rugged and the gas had to be transported from the freezing waters off the island’s north coast to a liquefaction and export terminal in the warmer sea to the south.
Shell originally held a majority stake but was criticized by Russian authorities, mainly due to allegations of environmental violations. In 2007, Shell and its Japanese partners bowed to pressure to sell a majority stake to Gazprom.
Mr. Putin may be trying to avoid what happened with another project on the island, Sakhalin-1. The facility was operated by Exxon Mobil, which has a significant minority stake and, like Shell, has also said it is pulling out of Russia. In recent months, the facility’s oil exports have fallen sharply. In June, not a single tanker took crude oil from the facility, compared to an earlier average of about one ship every three days, said Viktor Katona, an analyst at Kpler, a firm that tracks oil transportation. .
The presidential order is unlikely to inflict much immediate damage on Shell, Europe’s largest energy company, which posted a record $9.1 billion profit for the first quarter of this year, due to the high oil and gas prices. It could, however, herald more heavy-handed tactics against Western oil companies that still have assets in Russia.
After the invasion of Ukraine in February, Shell said it would leave Sakhalin-2 and other businesses in Russia, although it did not set a specific date or indicate what it would do with its participation and other businesses. In May, Shell sold its gas stations in Russia to Lukoil, a private Russian company.
If it abandons Sakhalin-2, Shell would also lose its share of the liquefied natural gas exported by the project, which accounted for about 5% of the company’s global LNG trade last year, according to an estimate by Bernstein, a research firm. .
LNG may be big business for Shell, but Bernstein analyst Alexander McColl said the loss of Sakhalin 2 was “not a game-changer” for Shell.
The smooth flow of fuel supplies from Sakhalin-2 to Japan and other countries could be the main concern after this move. The facility can continue to operate under its new owner, but not having a top LNG operator like Shell to work with Gazprom won’t help in the long run, Mr McColl said.
Mitsui and Mitsubishi said there had been no impact on production at Sakhalin-2 so far.
Sakhalin-2 is of great importance to Japan, supplying around 8% of the country’s liquefied natural gas, a mainstay of the power industry in recent years that was already under pressure.
After the Fukushima nuclear meltdown in 2011, Japan adopted liquefied natural gas as a fuel that is cleaner than coal and safer than nuclear. About a third of Japan’s electricity now comes from LNG-burning power plants. In recent months, however, prices have soared as Japanese buyers find themselves competing with European utilities scrambling to fill gas shortages from Russia.
After Western oil companies announced their intention to leave Russia after the invasion of Ukraine, Prime Minister Fumio Kishida said that Japan could not afford to withdraw from Sakhalin-2, which it had described as “extremely important for Japan’s energy security”.
However, after Mr Putin’s decision to take over the business, Mr Kishida said the government needed to keep “a close eye on the kind of demands” the new arrangement might bring.
Ben Doley and Hisako Ueno contributed report.