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Russia seizes control of Sakhalin gas project and raises stakes with the West

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  • Putin signed a decree on the protection of all rights on Thursday
  • Five-page executive order follows tougher Western sanctions
  • Relocation raises risks for Western firms still in Russia
  • Shell has already negotiated the sale of a stake in Sakhalin

TOKYO/LONDON, July 1 (Reuters) – President Vladimir Putin has raised the stakes in the economic war with the West and its allies with a decree that puts him in full control of the Sakhalin II oil and gas project in Russia’s Far East. this could drive out Shell and Japanese investors.

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

The five-page executive order, following Western sanctions imposed on Moscow over its invasion of Ukraine, indicates that the Kremlin will now decide whether foreign partners can stay.

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State-owned Gazprom (GAZP.MM) already owns 50% plus one share in Sakhalin II, which accounts for about 4% of global liquefied natural gas (LNG) production.

The move threatens to disrupt an already tight LNG market and heightens the risks facing Western companies still based in Russia.

“The Russian decree effectively expropriates foreign stakes in Sakhalin Energy Investment Company, marking a further escalation in ongoing tensions,” said Lucy Cullen, chief analyst at consultancy Wood Mackenzie.

Many Western firms have already rallied while others have said they will leave, but Putin’s move makes an already difficult process more difficult for those looking to get out. Moscow is preparing a law, expected to be passed soon, allowing the state to confiscate the assets of Western firms that choose to leave.

Shell, which has already written off the value of all its assets in Russia, made it clear a few months ago that it intends to pull out of the Sakhalin-2 project and is in talks with potential buyers. On Friday, he said he was evaluating the Russian decree.

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

Sakhalin-2, in which Shell owns 27.5% minus one share, is one of the world’s largest LNG projects with a production volume of 12 million tons. Its cargoes are mainly sent to Japan, South Korea, China, India and other Asian countries.

The Japanese Mitsui owns 12.5% ​​of the shares of Sakhalin-2, Mitsubishi – 10%.

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Japan, heavily dependent on energy imports, has previously said it will not give up its interests in the project.

Japanese Prime Minister Fumio Kishida said on Friday that Russia’s decision would not immediately stop LNG imports from development, while Japanese Industry Minister Koichi Hagiuda said the government did not consider the decree a requisition.

“The decree does not mean that LNG imports to Japan will immediately become impossible, but all possible measures must be taken in preparation for unforeseen circumstances,” Hagiuda told reporters.

Japan has 2-3 weeks of LNG stocks held by utilities and city gas suppliers, he said, and Hagiuda has approached his US and Australian energy counterparts for alternative supplies.

Japan imports about 6 million tons per year, or 10% of its LNG, from Russia, mainly under long-term contracts with Sakhalin-2.

Under the ruling, Gazprom retains its stake, but other shareholders must apply to the Russian government for a stake in the new firm within one month. The government will then decide whether to allow them to keep the stake.

Gazprom, Sakhalin Energy and the Russian Energy Ministry did not respond to requests for comment.

A Mitsubishi spokesman said the company is discussing with partners in Sakhalin and the Japanese government how to respond to the decree. Mitsui didn’t comment right away.

Shares of Mitsui & Co (8031.T) and Mitsubishi Corp (8058.T) fell more than 5% on Friday, a much sharper drop than the market as a whole. Shell shares in London were virtually unchanged.

Shell Chief Executive Ben van Beurden told reporters on Wednesday that the company has “made significant progress” in its exit plan from the Sakhalin Energy joint venture.

“I can tell you when I got the update last week I was very happy with where we are,” he said, without going into detail.

Sources told Reuters in May that Shell was in talks with an Indian consortium to sell its stake. read more

Russian LNG production at projects like Sakhalin II is likely to suffer over time as foreign expertise and parts become unavailable, said Saul Kavonik, head of integrated energy and resources research at Credit Suisse.

“This will significantly shrink the LNG market this decade,” he said, adding that any increase in Russian state involvement in LNG projects would make some buyers more wary of buying cargo.

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Reporting by Yuki Obayashi, Sakura Murakami, Ju-min Pak, Kiyoshi Takenaka in Tokyo, Ron Busso in London, Emily Chow in Kuala Lumpur, Muyu Xu in Singapore and; Written by Chang-Ran Kim and Edmund Blair; Editing: Simon Cameron-Moore and Carmel Crimmins

Our Standards: Thomson Reuters Trust Principles.

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