Russia Ups Stakes in Sakhalin Energy Standoff in Sanctions Retaliation

Friday, August 5, 2022

Russia increased pressure on investors in its two Pacific energy projects which once helped Moscow rebuild its economy, blaming ExxonMobil for falling oil output at Sakhalin-1 and giving shareholders of Sakhalin-2 a month to claim their stakes.

Western countries and allies, including Japan, piled sanctions on Russia after it sent troops into Ukraine in late February. Moscow retaliated by creating obstacles for Western businesses and their allies leaving Russia, and in some rare cases seized their assets.

Sakhalin-1 and Sakhalin-2 offshore projects in Russia's far east were launched in 1990s when Moscow was wooing deep-pocketed foreign investors to bring cash it needed to rebuild its economy after the fall of the Soviet Union.

On Thursday, Russian state energy champion Rosneft blamed a slump in oil production at Sakhalin-1 - and where it has a stake - on the operator, ExxonMobil.

It said that no oil tankers have left the De Kastri sea terminal after May 6 and that since mid-May Sakhalin-1 produced hardly any oil. It did not say how much the project is pumping now, if at all.

The statement followed the U.S. energy major's announcement on Wednesday that it was in the process of transferring its 30% stake in Sakhalin-1 oil and gas project "to another party," without naming it.

"As of now, De Kastri reservoirs are 95% full, oil is not being offloaded (for exports)," Rosneft said, adding that it had no information about Exxon's stake transfer.

Russia said last month that oil production at Sakhalin-1 had fallen to just 10,000 barrels per day (bpd) from 220,000 bpd due to the sanctions imposed on Moscow.

Month for Sakhalin-2 investors
Separately, a Russian government decree signed on Aug. 2 and published late on Wednesday gave foreign investors at Sakhalin-2 liquefied natural gas (LNG) project - Royal Dutch Shell and Japanese trading houses Mitsui & Co and Mitsubishi Corp - a month to claim their stakes in a new entity which will replace the existing project.

The state gas company Gazprom will receive a just over 50% of the new Russian entity replacing the Sakhalin Energy company and the new company will hold the remaining 49.99% until existing Sakhalin-2 shareholders applied for a stake, with early September set as a deadline.

If they failed to do so, the stake in the new entity will be evaluated and sold by the government to a Russian entity, as per decree signed by President Vladimir Putin in June.

"We continue to work on finding an acceptable arrangement that enables us to withdraw from our share in Sakhalin Energy in line with applicable legal requirements and project agreements," Shell spokesperson told Reuters.

Mitsui & Co and Mitsubishi Corp on Tuesday cut the value of their stakes in the Sakhalin-2 LNG project by 217.7 billion yen ($1.62 billion) after Moscow's move to seize control of it.

Japan's government, however, reiterated its wish for the Japanese companies to maintain their stakes there.

"The Sakhalin-2 project is extremely important for stable energy supply to Japan, and we will basically continue to maintain the stakes," Japanese industry minister Koichi Hagiuda told reporters on Thursday. The government is looking into details of the new entity, he said.

Mitsui and Mitsubishi, which together hold a 22.5% stake in the project, said separately that they were examining details of the new entity and would respond while cooperating with the Japanese government and with each other.

Tokyo has said it would support the trading companies in their efforts to stay in the Sakhalin-2 project. Japan imports about 10% of its LNG from Russia, mainly from Sakhalin-2.

The project's successor will be registered in the city of Yuzhno-Sakhalinsk on the Russian Pacific island of Sakhalin. The Sakhalin-2 LNG plant is located 60 km (37 miles) south of Yuzhno-Sakhalinsk.


($1 = 134.0900 yen)

(Reuters - Reporting by Reuters; Editing by Alexander Smith, Kenneth Maxwell, David Evans and Tomasz Janowski)

Categories: Energy LNG Russia Oil Production Natural Gas

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