Sakhalin is Russian: Is Moscow driving the West out of key energy projects?

President Putin has ordered ownership of the LNG operation to be transferred to a new national entity

President Vladimir Putin has signed a decree to transfer the rights to the giant oil and liquefied natural gas project Sakhalin-2 to a new Russian company. The move comes in response to actions by « hostile states » and could kick out foreign stakeholders, including British and Japanese investors.

1. What is Sakhalin-2?
   It is one of the largest LNG projects in the world with an annual production of 12 million tons. The joint venture between Russia’s Gazprom, Japan’s Mitsui and Mitsubishi and Britain’s Shell was launched in 2009. The facility is located on the Russian island of Sakhalin in the Pacific Ocean, north of Japan. It supplies LNG mainly to Asian markets.
   
2. Who are the actors of the project?
   Sakhalin-2 was managed and operated by the Sakhalin Energy Investment Company. The majority stake (50%) plus one share is owned by Russian energy giant Gazprom. Shell, the world’s largest LNG trader, has a 27.5% stake minus one share, Mitsui’s share totals 12.5%, while Mitsubishi has a 10% stake in the project.
   
3. What does Putin’s decree say?
   The presidential decree creates a new Russian company to take over all the rights and obligations of Sakhalin Energy Investment. Gazprom will retain its stake while the other partners will have one month to notify whether they want a stake in the new company. If permission is refused by the Russian government, the holdings would be sold and the sale proceeds would be transferred to a special account. The money could then be used to reimburse unspecified damages or be sent to the shareholder as part of the production sharing agreement, according to the executive order. Those who opted out may not be fully compensated.
   
4. Is Russia nationalizing the project?
   The change in ownership of Sakhalin-2 cannot be considered nationalization, according to Kremlin spokesman Dmitry Peskov. Asked by reporters on Friday whether other energy projects would follow, Peskov said each situation would be considered on a case-by-case basis.
   
5. How have foreign players reacted?
   Shell said on Friday that the company was aware of the executive order and that it « assess its implications. » The company made clear its intention to exit the project months ago and has been in talks with potential buyers, including from China and India. These projects seem threatened.

   Japan has previously said it will not give up its interests in the Sakhalin-2 project, which is important for its energy security. Moscow had previously accused Japan of benefiting from its participation in the project while being a « hostile nation » that joined the West in imposing sanctions on Russia. It will not be easy for Japan to withdraw from the project, experts point out. Replacing Russian LNG from Sakhalin-2 would cost Tokyo $15 billion, with the price of imports jumping 35% if Mitsui and Mitsubishi pull out. But now Russia could make the decision for Japan and redirect its imports to other countries, such as China, India or Vietnam.
   

6. Could the changes hamper LNG supply?
   Moscow sees no reason to stop supplies to Sakhalin-2 after the new operator takes office. However, some analysts warn that the move could disrupt an already tight LNG market, given that Europe is increasing competition for liquefied natural gas amid a global energy crisis. Sakhalin-2 supplies about 4% of the current global LNG market.

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