Japanese and Indian Investors In Sakhalin Oil & Gas Must Follow New Participation Regulations

The Russian Prime Minister, Mikhail Mishustin, signed Order 2559-r on September 18 stipulating that specific conditions must be met by Sodeco (Sakhalin Oil & Gas Development Co. Ltd., the shareholders of which are Japex, the government of Japan, Itochu, Marubeni, and Inpex) and India’s ONGC Videsh Limited.

The updated criteria for participation in the Sakhalin-1 project must be met by its Japanese and Indian participants.

Sakhalin-1 includes three oil and gas fields: Chaivo, Odoptu, and Arkutun-Dagi off the northeast coast of Sakhalin Island. Their combined reserves are estimated at 307 million tonnes of oil and 485 billion cubic meters of natural gas. Production at Sakhalin-1 peaked at 12.96 million tonnes per year in 2019, after which it started to decline, dropping to 12.44 million tonnes in 2020 and 11.3 million tonnes in 2021. Exact production figures at the project for 2022-2024 have not yet been published.

President Vladimir Putin issued a decree last month adding to the list of requirements for foreign participants in the project. They must enter into contracts for the delivery of foreign-made equipment and spare parts that are needed to implement the Production Sharing Agreement (PSA), as well as contracts on technical cooperation. In addition, the decree states that foreign members of the consortium must “carry out actions that lead to the lifting of political and economic sanctions imposed by foreign nations that negatively affect the execution of the PSA, including by making legal appeals if necessary.”

They must also arrange to deposit money into Sakhalin-1 LLC’s liquidation account in an amount equal to that which was previously accumulated by the relevant participant in the liquidation fund of the PSA. This is a mandatory fund for the subsequent environmental cleanup of the operations.

The wholly Russian company, Sakhalin-1 LLC, has been the operator of the PSA project since October 2022, when it acquired part of the equity from Exxon Neftegas Limited, who exited the project. Other equity stakes were acquired by Japan’s Sodeco (30%) and India’s ONGC (20%).

However, India’s ONGC has been having problems formalizing its stake in the newly rearranged equity. It received its share of the project’s liquidation fund, about US$1.4 billion, in April 2023. However, it has been unable to transfer these funds to Sakhalin-1 LLC due to sanctions.

Should the situation not be resolved, the Sakhalin-1 project may again need to be restructured.