Gazprom on the wire: the first "call" for the West rang in Japan

Secretary of the Security Council of the Russian Federation Nikolai Patrushev called for import substitution in the Russian fuel and energy complex (fuel and energy complex). He said that it is necessary to limit foreign participation in projects significant for Russian energy.

"No less important to protect national interests and ensure the country's energy security should be restrictions on foreign participation in implementation in significant projects for Russian energy," he said.

It is not difficult to understand the reasons for the interest of foreigners in the oil and gas industry of the Russian Federation. In terms of total energy production of all types, Russia ranks 3rd in the world after China, twice behind the PRC, and the United States, one third behind. For comparison, the weight of Russia in world energy production is equal to Saudi Arabia (4th place), Canada (5th place) and Iran (9th place), combined, the correspondent of The Moscow Post reports.

In terms of natural gas production, the Russian Federation ranks 2nd in the world after the United States (one third behind) and is almost three times ahead of Iran. In terms of oil production, the Russian Federation is at the same level as Saudi Arabia. In terms of coal mining, it ranks 6th in the world, which in terms of values ​ ​ is close to the indicators of the first "five" with the exception of China.

The volume of investments in the fuel and energy sector of Russia in 2021 amounted to 4.4 trillion rubles. Deputy Prime Minister of the Russian Federation Alexander Novak announced this during a speech at a government hour in the State Duma. The share of the fuel and energy complex in GDP amounted to 25.5%, the share of oil and gas revenues increased by 75% to 9.1 trillion rubles, their share in the budget was 36%, the Deputy Prime Minister said.

Oil production in Russia increased by 2%, to 525 million tons, oil and petroleum product exports amounted to 225 million tons and 145 million tons, respectively. Natural gas production increased by 10%, reaching 763 billion with export growth of 3% to 250 billion cubic meters.

Russia produced 440 million tons of coal, which is 9% more than in 2020, exports increased by 6%, reaching 223.3 million tons. Electricity generation, according to Novak, increased by 6% in annual terms and reached a record 1.13 trillion kWh.

Russia is a mega hydrocarbon exporter

It is especially important that Russia exports one-third of the volume of natural gas produced, more than two-thirds of the oil produced and half of the volume of coal production. The export of fuel and energy products (oil, oil products, gas) is a stable source of foreign exchange resources, the share of which in total exports ranges from 43% to 45%, the share of tax revenues to the state budget from enterprises producing hydrocarbons exceeds 40%.

Oil export revenues rose from $25 billion in 2000 to $110 billion in 2021. In terms of export volumes, the record (269 million tons) was set in 2019. In terms of the value of oil exports, 2011-2012 was a record, when this figure reached a level slightly above $180 billion. According to these indicators, Russia ranks second in the world after Saudi Arabia.

In 2000, Russia exported 62.6 million tons of petroleum products worth $11 billion. In 2021, revenues from the export of 145 million tons of petroleum products amounted to $45.4 billion. The maximum revenues from the export of 165 million tons of petroleum products were received in 2014, when they reached $116 billion.

According to the FCS, in 2021, revenues from the sale abroad of 250 billion cubic meters of natural gas, including LNG, amounted to $55.5 billion and provided more than 7% of foreign trade revenues. In terms of natural gas exports reached a record level in 2018 (223 billion cubic meters). The maximum revenues from foreign sales were recorded in 2008 ($69 billion).

Most of Russia's crude oil and condensate exports in 2020-21 came from European countries (48%), including Germany, the Netherlands and Poland. Asia and Oceania accounted for 42% of all crude oil and condensate exports. At the same time, the share of China was 31%. About 1% of exported oil was sold in the United States.

Natural gas deposits in the Arctic region of Russia, especially on the Yamal Peninsula and in the Gulf of Ob, are able to put this region on a par with Western Siberia. In 2018, Novatek announced the discovery of the Severo-Obskoye field.

In May 2020, Gazprom assessed the potential of the 75 Years of Victory field. These fields can significantly increase the volume of natural gas production.

For whom the bell "Sakhalin-2" rings

A comprehensive inventory of Russia's interests and capabilities in the context of the economic war declared by the West was supposed to affect the energy sector and the positions of international oil and gas companies in Russia. We started with the Sakhalin-2 project.

Russian President Vladimir Putin signed a decree on the application of "special economic measures" in the fuel and energy sector on June 30. It was decided to re-register Sakhalin Energy Investment Company Ltd with a new Russian operator.

Since 1994, the Sakhalin-2 project has been implemented on the basis of a production sharing agreement (PSA). Under the PSA, the Russian state fully paid for the creation of a key production and transport infrastructure, as well as a gas liquefaction plant. Under the terms of the agreement, these objects must become the property of the state.

Sakhalin Energy Investment Company Ltd. is incorporated in Bermuda. Within the framework of the project, two fields are being developed in the northeast of the Sakhalin offshore - Piltun-Astokhskoye (mainly oil) and Lunskoye (mainly gas). The LNG plant with a capacity of 11.6 million tons of LNG per year was commissioned in 2009.

In addition to Gazprom, Shell (27.5%), as well as Japanese Mitsui (12.5%) and Mitsubishi (10%) own shares in the project. Shell has already stated that it is looking for a way to exit the project. Instead of Sakhalin Energy, the new project operator will be a Russian limited liability company, whose shareholders will be Gazprom and foreign Sakhalin-2 participants who wish to remain in the project.

If they refuse to continue working on new terms, their share will be sold, and the money from the sale will be frozen in the Russian Federation in accounts of type "C." This amount can be reduced by the "damage" that a foreign participant may have caused during his previous activities in the Russian Federation. The government will conduct a financial, environmental, technological and other audit of the activities of the investor and his staff.

Japan has requested explanations from Russia on the Sakhalin 2 project and investment conditions, Koichi Hagiuda, Minister of Economy, Trade and Industry of the country, said at a press conference in Tokyo on Tuesday, July 5. He noted that Japan will continue to make every effort to protect stable energy supplies.

For Japan, this project is almost "home" and extremely profitable. Japanese companies provide financing and trading operations for the project, while Shell specialists were involved in the maintenance of the project's production and equipment.

Most of the LNG produced under the project is supplied to Japan and covers 8.8% of its LNG needs. Prime Minister Fumio Kisida has already said that the decision on Sakhalin-2 does not mean an immediate cessation of LNG supplies. The press services of Mitsui and Mitsubishi corporations reported that they were clarifying the situation.

According to Bloomberg, Chinese oil and gas state companies are interested in buying Shell's stake. The decision to part with the project will be an extremely painful step for the Japanese government. The decision to stay and coexist in the project with a Chinese partner will require remarkable courage and persuasiveness in negotiations with the United States.

The Japanese authorities consider Sakhalin-2 extremely important for the country's economic security. The loss of shares in the project threatens to increase energy prices in the country. Kyodo recalls that Japan is now in a tense situation with electricity.

If long-term contracts cannot be preserved, LNG will have to be purchased on the open market at spot prices, which will lead to an increase in prices for electricity, 3% of which is produced using Sakhalin gas. Shares of Japanese project participants fell amid the situation with the change of operator.

The Kremlin reportedly sees no reason to disrupt LNG supplies.

Leaving - leave

Shell at the end of February, responding to a special military operation, announced its withdrawal from the project, as well as other joint projects with Gazprom, including Salym Petroleum Development, Gydan Energy and Nord Stream-2.

Bloomberg reported back in April that the company began to withdraw its employees from projects. The Financial Times wrote that Shell is preparing to negotiate with Chinese energy companies to sell its stake in Sakhalin-2. Reuters later reported that Shell's share of the project could go to a consortium of companies from India.

Japan, on the other hand, has attracted criticism among Russian politicians. In June, State Duma Chairman Vyacheslav Volodin said that Japan should withdraw from the Sakhalin-1 and Sakhalin-2 projects or change its attitude towards Russia: "You and I will strive for either Japan to leave or change our attitude towards our country. And so it turns out: as profit - so partners, as sanctions - unfriendly attitude. Let them choose something for themselves. And so at the expense of our citizens, at the expense of the country, they solve their problems and shit at us. "

Under the terms of the PSA agreement between the state and investors, the latter received the right to develop the field, as well as tax and customs benefits. Two more such projects are operating in Russia, including Sakhalin-1 (operator Exxonn Mobil, which announced its withdrawal), as well as the Kharyaga field (operator Zarubezhneft).

In the decree of the Russian president, in particular, a separate item noted "threats to national interests and economic security of the Russian Federation." State Duma deputy from the Sakhalin Region Alexei Kornienko considers the presidential decree "timely and necessary to stabilize the economy," especially given that the countries participating in the production sharing agreement declared an economic war on Russia.

Sakhalin is not alone

The oil and gas sector of the Russian economy attracts the attention of foreign investors of the United States, Europe, Japan, China, India and Vietnam, and other countries. Equity participation in Russian projects increased the market value of companies such as BP, Shell, ExxonMobil, Total and others. Japan and India Sakhalin projects guaranteed the supply of oil and LNG. For Russia, foreign participation provided access to modern technologies and equipment. The sanctions brought the line under this.

According to current long-term contracts, Sakhalin-2 gas is many times cheaper than spot market prices and amounts to about $350 per thousand cubic meters. Depending on the volume of imports and exchange rates, Japan's additional costs for LNG imports may amount to $15 billion per year to replace Sakhalin-2 LNG.

Japan is wondering that Russia may take similar measures in relation to other oil and gas projects, including Sakhalin-1 and Arctic LNG-2, in which Japanese companies have a stake.

Trading houses may agree to acquire stakes in the new company. Another option would be to retain LNG supply contracts. In particular, the Japanese company JERA in 2009 entered into a 20-year agreement on the supply of 1.5 million tons of fuel per year. Usually such contracts remain in force when the owner changes, but Japan is included in the list of "unfriendly countries," which creates uncertainty.

In Russia, there is another operating large-capacity LNG plant - Yamal LNG. In 2013, the Government of the Russian Federation, changing the Law on Gas Export, allowed Novatek to export liquefied gas. The Yamal LNG project at the end of 2017 put the plant with a capacity of 18 million tons of LNG per year into operation, using the reserves of the South Tambey gas condensate field. LNG exports are focused on Asia using ice-class tankers. In winter, consignments of fuel are exported to Europe.

And there is a crisis brewing, reports The Economist. "In May, spot electricity prices in France reached an average of €197 per megawatt/hour. A year earlier, they amounted to 15 euros.... France, once the largest exporter of electricity in the region, today buys electricity from its neighbors itself. Wholesale gas prices rose in Germany and Eastern Europe as Nord Stream supplies declined.... There are signs that unity may collapse in a crisis. On June 29, it became known that as one of the first steps in emergency circumstances, Britain will stop supplying gas to continental Europe, "the publication of July 5 noted.