Russia's Sakhalin 2 May Double LNG Revenue as Top Buyers Stay Despite Ukraine Crisis

(Reuters) — Russia's Sakhalin 2 LNG project could generate twice the revenue this year that it did before the Ukraine conflict thanks to long-term deals with Asian buyers and higher prices, according to analysts and Reuters calculations.

State-run top shareholder Gazprom stands to benefit from the boost which comes as Russia ramps up its military spending almost a year after sending troops into neighboring Ukraine.

Moscow has already tapped its rainy-day fund, boosted domestic borrowing and is considering raising taxes.

Shell quit Sakhalin 2 as one of the many Western firms which pulled out of Russia after Moscow launched what it dubbed its "special military operation".

Renewed deals with Asian buyers could secure demand for 6.5 million tonnes of LNG annually from Sakhalin 2, according to contractual volume data from the GIIGNL international group of LNG importers and Reuters calculations.

That could generate $3.8 billion to $4.5 billion in revenue for Sakhalin 2 shareholders this year, according to Masanori Odaka, a senior analyst on Rystad Energy's gas and LNG team.

The project could earn another $7.45 billion this year if it keeps production in line with 2022 and sells 4.9 million tonnes of LNG on the spot market, according to Alexei Kokin, chief analyst at Russia's Otkritie brokerage.

The project was forecast to produce 11.4 million tonnes of LNG last year, a senior official from Russia's Sakhalin region had said, but the final figure is yet to be released.

In 2021, Sakhalin 2's revenue totaled $5.7 billion and net profit was $2 billion.

But Asia spot LNG prices LNG-AS jumped 42% in 2022 to average $38.80 per million British thermal units.

With spot prices in Asia estimated to be higher than long-term deals, marketing additional volumes could be challenging, Rystad's Odaka said.

China's Sakhalin LNG imports more than doubled in 2022 to 33 cargoes, Refinitiv Eikon data showed.

It was not immediately clear what would happen to the 2.75 million tonnes of LNG previously taken annually by Taiwan's CPC, whose contract ended last year, by Shell and by Gazprom Global LNG, which was nationalized by Germany last year in its sanctions stand-off with Russia.

All three have stopped receiving LNG supplies from Sakhalin 2, their officials said.

Shareholders

After Shell's departure, the Kremlin created a new entity to run Sakhalin 2, one of the top LNG plants globally.

Japanese shareholders Mitsui & Co 8031.T and Mitsubishi Corp 8058.T applied to retain their stakes.

They hold a combined 22.5% stake alongside Gazprom, which has a 50% holding.

Shell's 27.5% stake is now held by Sakhalin Energy. Russia has yet to name a new shareholder to replace Shell.

Sakhalin Energy, the managing company for Sakhalin 2, did not reply to a Reuters request for comment.

Last week, Osaka Gas Co Ltd 9532.T became the latest Japanese company to renew its deal to buy Sakhalin 2. It will take 200,000 tonnes of LNG per year, or about 2% of its output.

South Korea's KOGAS continues to offtake LNG under its 10-year contract, its spokesman said, and Japanese Hiroshima Gas, JERA, Kyushu Electric, Saibu Gas, Toho Gas, Tohoku Electric and Tokyo Gas have also renewed their deals.

While Asian energy firms have declined to provide specifics of their renewed agreements, they have said conditions were either similar or little changed from previous deals.

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