Putin orders transfer of Sakhalin-2 assets to new Russian company; Japanese firms have stakes in current company

The Yomiuri Shimbun

15:44 JST, July 1, 2022

Russian President Vladimir Putin on Thursday signed a presidential decree ordering the operator of an oil and gas development project in the Russian Far East — known as the Sakhalin-2 project — to hand over all of its assets to a newly established Russian firm without compensation.

Japanese companies are among the investors in the current operator, Sakhalin Energy Investment Company Ltd. (Sakhalin Energy), and it was not immediately clear whether they would continue to invest in the project.

The decree — which states that the order is a special economic measure against unfriendly acts by several countries — is seen as retaliation against Japan and other countries that imposed sanctions on Russia over its invasion of Ukraine.

Russia’s state-run Gazprom is Sakhalin Energy’s largest shareholder with a stake of more than 50%, while Mitsui & Co. and Mitsubishi Corp. have stakes of 12.5% and 10%, respectively. In February, Britain’s Shell PLC, which has a stake of nearly 27.5%, announced its withdrawal in line with the tightening of economic sanctions against Russia by the United States and Europe.

The decree states that the Russian government will create a new Russian corporation that will “take over all the rights and obligations of the current project operator.”

Gazprom will retain its investment, but other shareholders will have one month to decide whether to agree to acquire shares of the new company. If so, the shareholders would have to apply to the Russian government to obtain its approval to keep investing in the project. However, it is not clear how the Russian side may react.

The Putin administration has designated Japan, the United States and many European states as “unfriendly countries” in connection with Russia’s invasion of Ukraine.

The chairman of the Duma, the lower house of Russia’s parliament, is among those who have said that the interests of Japanese companies in the Sakhalin-2 project should be handed over to Russian companies.

Japan’s energy situation fragile

The sudden announcement by Russia has caused confusion in the Japanese government and among the companies that have invested in the liquefied natural gas project.

About 60% of the LNG produced by Sakhalin-2 is destined for Japan. The government has stated that Japan will not withdraw from the project, with Prime Minister Fumio Kishida saying that it is “an extremely important project from the standpoint of energy security.” There were also voices that it would benefit Russia if the concessions held by Japanese companies were given to Russia or a third country.

Deputy Chief Cabinet Secretary Seiji Kihara said Friday, “Japan’s interests in resources must not be lost. We are currently scrutinizing the treatment of interests held by Japanese companies and the impact on LNG imports.”

Mitsubishi Corp. commented, “We are aware of the presidential decree and are discussing how to respond to it in cooperation with the government and our business partners, but production is continuing at present.”

Mitsui & Co. commented, “We are aware of the news reports, and are in the process of confirming the contents of and facts about the presidential decree.”

According to the Economy, Trade and Industry Ministry, LNG from Sakhalin-2 is equivalent to 3% of the electricity supply in Japan. If supply were to be disrupted, the tight situation in power supply-demand would be inevitably worsened.