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Mitsui, Mitsubishi Shares Fall as Russia Takes Over Sakhalin-2

The new firm will take over rights and obligations of Sakhalin Energy Investment Co, in which the two Japanese companies and Shell hold just under a 50% stake


A general view of the liquefied natural gas plant operated by Sakhalin Energy at Prigorodnoye on the Pacific island of Sakhalin
A general view of the liquefied natural gas plant operated by Sakhalin Energy at Prigorodnoye on the Pacific island of Sakhalin, Russia July 15, 2021. FILE PHOTO: REUTERS/Vladimir Soldatkin

 

Shares of Japan’s Mitsui & Co and Mitsubishi Corporation declined about 5% on Friday as Russia announced plans to set up a new company to take control of the Sakhalin-2 oil and gas project.

The new firm will take over rights and obligations of Sakhalin Energy Investment, in which the two Japanese companies and Shell hold just under a 50% stake, a decree issued on Thursday by Russian President Vladimir Putin said.

Mitsui has a 12.5% stake in the project and Mitsubishi 10%, while Shell holds 27.5%, minus one share. Russian gas giant Gazprom has 50%, plus one share.

The five-page decree, which comes amid Western sanctions on Moscow over the invasion of Ukraine, indicates that it is up to the Kremlin to decide whether foreign shareholders are to remain in the consortium.

Japan has previously said it would not give up its interests in the Sakhalin-2 project, which is important for its energy security, even if asked to leave.

“This should have an incremental negative hit for Sakhalin-2 asset owners,” Jefferies analyst Thanh Ha Pham said. “Dividend income from this asset is becoming uncertain, and could impact shareholders’ returns.”

Sakhalin-2 supplies about 4% of the world’s current liquefied natural gas (LNG) market. Japan, South Korea and China are the main customers for oil and LNG exports, according to Shell.

 

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Asked about Putin’s decree, a Japanese industry ministry official said the government was looking into the contents, adding that the issues of ownership and the supply of liquefied natural gas (LNG) may be unrelated. Japan continues to import LNG from Sakhalin-2.

Officials at Mitsui and Mitsubishi said they were checking the decree and could not immediately comment further.

According to the decree, Gazprom will keep its stake, but other shareholders are expected to ask the Russian government for a stake in the new firm within one month. The government will then decide whether to allow them to keep the stake.

 

Production Sharing Agreement

If they are not permitted to keep their stake, the government will sell their stakes and keep the proceeds in a special account of the shareholder.

Proceeds from this account can be sent to the shareholder or used to repay unspecified damages under the production sharing agreement, the decree said.

Shell is in talks with a consortium of Indian energy companies to sell its stake in Sakhalin-2, sources said in May.

Shell CEO Ben van Beurden told reporters on Wednesday the company was “making good progress” in its plan to exit from the Sakhalin Energy joint venture.

“I cannot tell you exactly where we are because it’s a commercial process so I have to respect confidentiality … but I can tell you when I got an update last week, I was really pleased with where we are.”

 

  • Reuters with additional editing by Sean O’Meara

 

 

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Sean O'Meara

Sean O'Meara is an Editor at Asia Financial. He has been a newspaper man for more than 30 years, working at local, regional and national titles in the UK as a writer, sub-editor, page designer and print editor. A football, cricket and rugby fan, he has a particular interest in sports finance.

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