Our Take: Sakhalin Shake-Up Could Be Tip of Iceberg

Russian President Vladimir Putin’s decision to abruptly change the ownership structure of the Sakhalin-2 upstream and LNG project should come as no surprise to its foreign shareholders — Shell, Mitsui and Mitsubishi. Energy Intelligence believes other Western participants in the Russian energy sector should see the move as a sign of things to come. Companies that have opted to wind down positions in Russia after its invasion of Ukraine may have shielded themselves from criticism at home but can expect to feel the wrath of an increasingly impatient and nationalistic Moscow, which is still reeling from what it considers to be illegal sanctions and expropriation of Russian assets overseas.

• Shell is assessing the implications of the presidential decree that calls for the replacement of Bermuda-registered operator Sakhalin Energy Investment Co. — comprising state-controlled Gazprom (50% plus one share), Shell (27.5% minus one share), Mitsui (12.5%) and Mitsubishi (10%) — with a Russian company. The UK-based supermajor took a $1.6 billion impairment on Sakhalin-2 in its first-quarter earnings, having declared its intention to withdraw from Russian hydrocarbons in a statement lamenting the “atrocities” in Ukraine.

• History repeats itself. While the geopolitical landscape was very different at the time, Sakhalin-2 has undergone a government-engineered change of operatorship before. In 2005, Shell, then operator of Sakhalin-2 with a 55% stake, attracted scrutiny after its budget for the project doubled to $20 billion. Under intense environmental pressure, Shell ultimately ceded control to Gazprom the following year.

• Mitsui and Mitsubishi, which also reduced their stakes in 2006, will take their cue from the Japanese government in the latest twist. Sakhalin-2 is too strategic and important an asset for Tokyo for the corporates to take a decision by themselves. Japan, while adopting a firmer line on Russian sanctions under Prime Minister Fumio Kishida and branded an “unfriendly” country by Moscow, will not want to lose Sakhalin-2 term LNG supply amid current eye-watering energy prices. But a new deal with Russia would invite heavy criticism from the G7.

• Putin's move gives the partners a one-month deadline to decide once and for all whether to stay or go, rather than continue to leave investors and operations in limbo. US major Exxon Mobil, meanwhile, has said it will discontinue operations at nearby Sakhalin-1 but is yet to hand over control. Moscow is understood to be frustrated with the drop in the project's oil production to just 6,000 barrels per day in the meantime.

• Sakhalin-1 could be Putin's next target. Exxon has a 30% stake in the venture, as does Japanese consortium Sodeco. Japan could also have concerns about the fate of Arctic LNG-2, in which Mitsui and state-owned Jogmec have a combined 10% interest. Even BP’s 19.75% stake in Rosneft could be taken away before the major has managed to offload it.