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/ World / Economy / Energy dialogue / Oil&Gas

Sakhalin 2 gas project comes under Moscow's countermeasures

President Putin has ordered the transfer of the project's property to Russia

05.07.2022 18:16 Alexander Pasechnik, head of the Analytical Department at the National Energy Security Fund

Context:

Trump brews revolution in American energy industry

In response to the collective West’s increased sanctions pressure, the Russian authorities have started contemplating countermeasures. June 30 saw Russian President Vladimir Putin sign a decree stipulating special economic policies in the energy sector over the ongoing hostile moves by foreign countries. The document prescribes changing the major Sakhalin 2 oil and gas project’s operator to a new legal entity (LLC) that will get all the assets belonging to Sakhalin Energy. The company’s property comes into Russia’s ownership with a concurrent granting of free use to the new Sakhalin 2 operator. The ostensible purpose for such a "realignment" is the "threat of an emergency situation of a natural and man-made nature" to the life and safety of people over the breach by foreign legal entities and individuals of obligations related to the production sharing agreement (PSA). The Russian side has paid up for the creation of a key mining and transport infrastructure, as well as an LNG plant to become state property, on the terms and pursuant to the conditions set out in the agreement.

Gazprom owns 50% plus one share in Sakhalin Energy; Shell has a package of 27.5% minus one share; while Japan’s Mitsui and Mitsubishi have 12.5% and 10%, respectively. The project focuses on two oil and gas fields being developed in the northeast of the Sakhalin shelf: Piltun-Astokhskoye (mainly oil) and Lunskoye (mainly gas). Infrastructure includes three offshore platforms, a combined coastal technological complex, an oil shipment terminal and an LNG plant with its rated output accounting for 9.6 million tons per year. The operator is Sakhalin Energy.

The procedure algorithm for the project’s current legal reorganization is as follows: Gazprom retains its share in it, and foreign actors must announce their stance within a month. Agreeing to preserve their previous shares in the new operator, they will get them. In case of refusal, the government of the Russian Federation will sell their packages within four months. Seemingly intended for payment to foreign players in Sakhalin Energy, the proceeds will be virtually frozen on special accounts. Non-residents won’t be able to dispose of this money, since a comprehensive audit (environmental, technological and other) of foreign companies’ activities in Russia is required to determine the amount of damage caused and those obliged to compensate for it, as per regulations. After that, the equivalent is debited from designated accounts for the benefit of Sakhalin Energy.

Thus, the Russian authorities encourage foreign companies to accede to the stipulated terms for preserving their shares in Sakhalin 2. Otherwise, foreign shareholders risk losing their shares or whatever compensation.

There is a variety of stances regarding further engagement in Sakhalin 2: Shell has long been looking for someone to buy its share, while the Japanese government, by contrast, has a strategic purpose of staying part of the project. Businesses echo the authorities, as head of Tokyo Gas Takashi Uchida stated back in April that Japan's withdrawal from the Sakhalin 2 project threatens energy supply stability of big urban centers, since finding an alternative to Russian LNG is more than meets the eye. According to his estimates, Sakhalin 2 accounts for about 8% of the country's gas portfolio.

The Japanese press has repeatedly noted that the country's authorities are concerned about a possible deal to sell Shell's stake to Chinese corporations (Bloomberg reported on Shell's negotiations with CNOOC, CNPC and Sinopec in June). Such a course of events threatens to undermine Japan's national energy security, because in this case the island’s LNG would be reoriented to the Chinese market.

The Sakhalin Energy case is indicative of the Kremlin's academic response protocol, while the Western "unfriendly pool" is acting in an absolutely incongruent format: Ottawa's challenging decision to extend sanctions against Moscow serves an ample proof here. Now the turbines being repaired in Canada cannot be returned to the "regular sites" of the Nord Stream gas pipeline system, contributing to truncated gas pumping mode. Starting July 11, Gazprom will shut down the Trans-Baltic pipeline for preventive maintenance altogether.

Sakhalin Energy’s restructuring does not affect the project’s current functioning –LNG and oil production and supply continue unabated.

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