Adds Japanese government comments in fifth paragraph
Shell's exit from the Sakhalin 2 integrated oil and gas project in Russia's far east has sparked mixed reactions from the LNG plant's term offtakers, with some concerned about longer-term operations and others shrugging off the move.
Shell on 28 February said it intends to exit all its Russian joint ventures with state-controlled Gazprom and related entities, including its 27.5pc in the Sakhalin 2 project, following similar moves by BP and Norway's Equinor in response to Moscow's invasion of Ukraine.
Whether or not the 9.6mn t/yr Sakhalin LNG liquefaction and export plant will be able to operate at capacity after Shell's pullout is the main concern among its term buyers, most of which are Japanese firms.
"The first thing is operation matters. If someone takes over Shell's role, it should be no problem, but I don't think it is easy," a trader at a Japanese utility said. "I think no one will take over [Shell's] role and I'm wondering how they [will] manage to keep [the] current production level," the trader added.
There is currently no impact on Japan's energy imports and the Sakhalin plant is expected to continue operating as normal, the Japanese government said today. Japan will work with international bodies such as the G7 group of developed nations to take necessary measures, while taking into account its national energy security, chief cabinet secretary Hirokazu Matsuno said.
The Sakhalin plant has typically produced above nameplate capacity, mostly at 11mn t/yr since at least 2018. This means that it can produce around 14 cargoes each month, based on a 65,000t cargo size. Sakhalin loaded 15 cargoes in February and 17 cargoes in January, according to vessel tracking data from oil analytics firm Vortexa.
"Some of the concerns [are] more around the materials required to maintain the plant and being operational. So whether they can continue to operate reliably [is] more the concern," a trader at an European utility said.
Apart from the LNG facility, the Sakhalin 2 project infrastructure includes three offshore platforms, an onshore processing facility, offshore and onshore pipelines and an oil export terminal.
"At the moment, [buyers] are not in so much hurry to buy additional cargo due to Sakhalin. But for the long term, we need to consider our energy security," a trader at a Japanese trading firm said, referring to the purchase of additional LNG for short-covering in the event supplies from Sakhalin are halted because of sanctions on Russia. But Japan has so far not imposed any sanctions on LNG.
Sakhalin is responsible for the majority of Russian LNG imports to Japan. The plant delivered 6.06mn t of LNG to Japan in 2021, accounting for 7.8pc of the country's total LNG imports of 77.58mn t during the year, according to Vortexa data.
"[The operational issue]'s a justifiable concern as many Shell staff work there. Let's see," a trader at an European firm said, adding that he agrees "with the anxiety" among buyers. Shell has 540 employees in Russia, including at Sakhalin, according to a source with knowledge of the matter.
Other term buyers have shrugged off Shell's exit from the project, suggesting that the impact may be more "structural".
"Sakhalin Energy … [is] sure [they are able] to produce and supply LNG without Shell," a trader at another Japanese utility said, adding that the lack of clarity on when Shell will exit the project adds to the uncertainty over the impact.
"There are locals who have been working on the ground at the plant in Russia and who learnt the skillsets [from Shell] … it may just be the case where more work is outsourced to more locals now," an analyst at a Japanese firm said. "The impact may be more structural than anything."
Fellow Sakhalin 2 consortium members Mitsui and Mitsubishi have not made any formal announcement on their investment in the project.
A Japanese trader said that the firms are still "considering what they are going to do [with] their equity", but others said it is unlikely they will follow in Shell's footsteps.
"The Japanese government doesn't have any intention to sanction Sakhalin because the project is one of the most important energy projects for Japan," the trader said.
At least eight Japanese buyers have term offtake agreements with Sakhalin. Japanese firms including Jera, Hiroshima Gas, Osaka Gas, Saibu Gas, Toho Gas, Tokyo Gas, Kyushu Electric and Tohoku Electric have contracts to receive a total of around 5mn t/yr from the project.
Japan on 1 March imposed additional sanctions on Russia, including an asset freeze on three more Russian banks, following those introduced in the last few days.
