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Russia orders to set up new operator of Sakhalin-2 LNG project in three days

Highlights

Move follows decree to transfer all Sakhalin Energy rights

Sakhalin Energy asks Japanese lifters to change settlement banks

Over half of Sakhalin 2 LNG capacity committed to Japanese offtakers

The Russian government has issued an order to set up a new operator for the Sakhalin 2 LNG project in the country's Far East within three days, entering a new phase of the project with supply security on spotlight.

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Under the government order issued Aug. 2, Sakhalinskaya Energija will be established in Yuzhno-Sakhalinsk as the new operator of the Sakhalin 2 project, according to the order published on the national legislative database Aug. 3.

Gazprom will hold just over 50% in the new entity in line with its ownership of the former operator. Foreign shareholders have a month from the entity's establishment to decide whether to take stakes, according to a previous Russian presidential order signed June 30.

The national taxation service was ordered to add it to the register within three days, at which point it will be considered established, according to the order.

Within three days after the company's creation, control and obligations related to Piltun-Astokhskoye and Lungskoye fields will be transferred, according to the order. The Federal Subsoil Agency also has three days to reissue licenses to the new company.

The Japanese government is confirming details about the Russian order and weighing its response, a government source said.

Supply concerns

"Under this government order, all rights and obligations based on the PSA (production sharing agreement) law will be transferred to the new company so that LNG SPAs (sales and purchase agreements) with buyers, though not mentioned, are considered to be included," Daisuke Harada, a project director at the Japan Oil, Gas and Metals National Corp. told S&P Global Commodity Insights.

"Therefore, based on the enforcement of the order for now, its content does not appear to have an immediate impact on LNG supply under the SPAs," Harada said.

The latest Russian order comes amid heightened concerns in Japan over potential LNG supply disruptions after Russia issued June 30 a decree to transfer all rights and obligations held by Sakhalin Energy to a new Russian entity.

The decree stipulates existing stakeholders have one month to submit their approval for the transfer of stakes to the newly created company, after which the government will rule on the admissibility of the submissions.

The Russian government will decide on transfer or refusal of participatory shares in the new entity and in the case of refusal, may sell to a Russian company within four months, the June presidential decree said. Money from such sales will be transferred to a special account from which the former shareholder can access it minus compensation for damages.

Changing banks

The latest move came as Sakhalin Energy, the seller of Sakhalin 2 LNG, has asked Japanese lifters to change their settlement banks ahead of an expected transition of the operating company.

At least two Japanese lifters of Sakhalin 2 LNG -- Kyushu Electric and Tohoku Electric -- confirmed July 29 that they had received requests from Sakhalin Energy to change their settlement banks.

A Tohoku Electric spokesperson confirmed Aug. 4 that it has started making payments into a new bank account for Sakhalin 2 LNG supply, based on a contract following a notice to change the account.

A Kyushu Electric spokesperson declined to comment Aug. 4 on the latest status on its response following the request to change its settlement bank.

More than half of the 9.6 million mt/year LNG production capacity at the Sakhalin 2 project, in which Japan's Mitsui has a 12.5% stake and Mitsubishi 10%, is committed to Japanese offtakers.

Mitsui and Mitsubishi officials said the companies are scrutinizing the Russian order and will consider their responses together with the Japanese government, as well as with other partners.

Russia accounted for 9% of Japan's total LNG imports of 74.32 million mt in 2021, its fifth-largest supplier, according to data from Japan's Ministry of Finance.