Russia seizes control of Sakhalin gas project, raises stakes with West

Russian President Vladimir Putin has signed a decree to take charge of the Sakhalin-2 project, raising the stakes with the West.

Russian President Vladimir Putin has raised the stakes in an economic war with the West and its allies with a decree that seizes full control of the Sakhalin-2 gas and oil project in Russia's far east, a move that could force out Shell and Japanese investors.

The order, signed on Thursday, creates a new firm to take over all rights and obligations of Sakhalin Energy Investment Co, in which Shell and two Japanese trading companies, Mitsui and Mitsubishi, hold just under 50 per cent.

The five-page decree, which follows Western sanctions imposed on Moscow over its invasion of Ukraine, indicates the Kremlin will now decide whether the foreign partners can stay.

State-run Gazprom already has a 50 per cent plus one share stake in Sakhalin-2, which accounts for about 4 per cent of the world's liquefied natural gas (LNG) production.

The move threatens to unsettle an already tight LNG market, although Moscow said it saw no reason for Sakhalin-2 deliveries to stop. Japan imports 10 per cent of its LNG each year from Russia, mainly under a long-term contract from Sakhalin-2. The action also raises the risks facing Western companies still in Russia.

"Russia's decree effectively expropriates foreign stakes in the Sakhalin Energy Investment Company, marking a further escalation in ongoing tensions," said Lucy Cullen, a principal analyst from consultancy Wood Mackenzie.

Many Western firms have already packed up, while others have said they would quit, but Putin's move adds complications to an already complex process for those looking for the exit. Moscow has been preparing a law, expected to pass soon, to allow the state to seize assets of Western firms which decide to go.