Putin issues decree to seize key exporter of natural gas in Russia's far east

Prices are displayed at a gas station in Miami on June 15, 2022. PHOTO: NYTIMES

MOSCOW (NYTIMES) - Russia is moving to take over an important natural gas joint venture, putting the investments of Shell and two Japanese energy trading companies at risk in a seizure of a significant foreign investment.

A decree issued by Russian President Vladimir Putin on Thursday (June 30) is directed toward Sakhalin-2, a project in Russia's far east that is a key exporter of liquefied natural gas to Japan.

The Kremlin's move raised concerns in Japan about the future of those shipments.

Gazprom, Russia's natural gas monopoly, has a controlling 50 per cent stake in Sakhalin-2, followed by Shell, the European oil giant, with 27.5 per cent, and Mitsui and Mitsubishi, two energy firms based in Japan with shares totaling 22.5 per cent.

The decree says that a new company will take over Sakhalin-2, and that the three foreign investors have one month to ask the Russian government to keep their stake in the new enterprise.

Shell has previously said it plans to exit the venture as part of its efforts to pull out of Russia because of the invasion of Ukraine.

On Friday (July 1), Shell said it was "assessing" the implications of Russia's move but declined to comment further.

Shell has already written off US$1.6 billion (S$2.23 billion) of the value of Sakhalin-2.

Mr Putin's move is the first time he has grabbed an international petroleum project since the invasion of Ukraine in February.

During his two decades in power, though, the Russian government has played hardball with foreign oil and gas companies. Essentially, Mr Putin and the Russian oil industry have wanted Western companies to bring to the table capital and technology but with Russian entities retaining control.

Shell led the way in developing Sakhalin-2, which is based on Sakhalin Island in the Pacific and was Russia's first liquefied natural gas facility, sending its first cargo to Japan in 2009.

It gave the country a foothold in the fast-growing fuel, which is chilled to a liquid so it can be transported on ships.

Building the project was tricky because the location was remote and rugged and the gas needed to be piped from icy waters off the northern coast of the island to a liquefaction and export terminal in the warmer sea to the south.

Shell originally had a majority stake but came under fire from the Russian authorities, mostly because of allegations of environmental violations.

In 2007, Shell and its Japanese partners yielded to pressure to sell a controlling stake to Gazprom.

Mr Putin may be trying to avoid what has happened with another project on the island, Sakhalin-1.

The facility has been operated by Exxon Mobil, which has a sizable minority stake and, like Shell, has also said it is pulling out of Russia.

In recent months, oil exports from the facility have dropped sharply. In June, not a single tanker took crude oil from the facility compared with a prior average of about one ship every three days, said Mr Viktor Katona, an analyst at Kpler, a firm that tracks petroleum shipping.

The presidential order is unlikely to inflict much immediate damage on Shell, Europe's largest energy company, which reported a record US$9.1 billion profit for the first quarter of this year, because of high oil and gas prices.

It could, though, herald other strong-arm tactics against Western oil companies that still have assets in Russia.

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