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Russia to set up new operator for its Sakhalin-2 oil and gas project

The Russian government on Aug. 2 ordered that a new operator be established for the Sakhalin-2 gas and oil extraction project, according to a report on Aug. 3 by the Russian state-owned news agency TASS.

Two Japanese trading companies, who are major shareholders of the project, must decide within a month if they will continue their involvement with it.

Observers view the move as retaliation against Japan and Western countries for imposing sanctions on Russia over its invasion of Ukraine, and worry it could have consequences for Japan’s energy security.

Gazprom, a Russian state-owned liquid natural gas (LNG) company, owns a controlling interest in the project–50 percent, plus one share.

The British oil giant Shell holds around 27.5 percent, while Japan’s Mitsui & Co. owns 12.5 percent and Mitsubishi Corp. has a 10-percent stake.

Its previous operator is a foreign company incorporated in Bermuda, an overseas British territory. But the new company will be a Russian firm located in Sakhalin.

Gazprom will continue to own the same percentage of shares in the new company, according to TASS.

It remains unclear how much of the remaining shares foreign companies will own. But for the time being, the new company will own the remaining shares.

Shell decided to withdraw from the project after the invasion started in February.

Both Mitsui and Mitsubishi intend to continue their involvement with the project, but they will have to agree to the conditions offered by Russia if they want to buy shares in the new company.

Otherwise, Russia could make it difficult for them to buy shares in the new company by arguing that they are overstepping their legal bounds.

In the Sakhalin region where the project is located, people are increasingly concerned that the project might come to a halt, which would be a major blow to local employment and tax revenue.

Dmitry Peskov, press secretary for Russian President Vladimir Putin, tried to assuage those concerns on July 1.

“There is no reason (for the project to stop) at the moment,” he said.

Officials from Mitsui and Mitsubishi said on Aug. 4 they were aware of Russia’s move to establish the new company but that they will scrutinize the details.

“It is necessary to maintain the stake in the project to continue the provision of energy to Japan,” said Tatsuo Yasunaga, chairman of Mitsui.

Both companies have said they will consider what they would do as they keep communicating with the government.

The two corporations want to continue funding the project, according to sources.

Russia has not yet made clear what the conditions will be for buying shares in the new company, according to sources.

Some worry about the risk that Russia might offer conditions that would reduce the voices of Japanese shareholders in the project. It could also offer conditions the Japanese companies would find unacceptable.

Yasunaga has said that if Russia offers “unacceptable conditions,” Mitsui may have to end its participation in the project.

Economy minister Koichi Hagiuda told a news conference on Aug. 5 that he had asked Mitsui to “actively consider participating in the new company.” He added he will make the same request to Mitsubishi as well.

Officials are on tenterhooks watching the ownership change because it could have major implications for Japan’s electricity grid in the very near term.

Around 10 percent of the LNG imported to Japan comes from Russia.

Most of it comes from Sakhalin-2 for use in thermal power generation and the provision of town gas by Japanese utilities.

Those electricity and gas companies have struck their own contracts with the Sakhalin-2 project.

That means that even if the Japanese trading companies lose their stakes in the project, it would not necessarily mean the provision of LNG to Japan from Sakhalin-2 would be immediately cut off.

Still, Russia could choose to break those contracts.

If the flow of LNG from the project dries up, it would have a huge impact on the electricity supply in Japan. And it could not come at a worse time.

Experts have predicted Japan is bound for an electricity shortage this coming winter.

Thermal power generation from LNG was the largest source of electricity production in fiscal 2020, responsible for generating 39 percent of electricity across Japan. Even a small loss of supply would be a blow.

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