Sakhalin Energy asks Japan's Sakhalin 2 LNG lifters to change settlement banks

Sakhalin Energy, the seller of Sakhalin 2 LNG, has asked Japanese lifters to change their settlement banks ahead of an expected transition of the operating company into a new entity following a Russian decree.

At least two Japanese lifters of Sakhalin 2 LNG -- Kyushu Electric and Tohoku Electric -- confirmed July 29 that the companies had received requests from Sakhalin Energy to change their settlement banks.

Commenting on the move by Sakhalin Energy, Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp., or Jogmec, said: "The move implies that the Russian side is proceeding to prepare a transition to a new entity for Sakhalin 2, as well as increasing uncertainty over the position of Sakhalin Energy."

"Considering requests to make payment in rubles for Russian pipeline natural gas supplies to Europe, as well as Gazprom's significant gas supply cuts via the

Nord Stream pipeline after European companies had cleared their hurdles over the rubles payment, I would not be surprised to see any impact on LNG supply from the Sakhalin 2 project in the future," Nogami said.

Russia accounted for 9% of Japan's total LNG imports of 74.32 million mt in 2021, its fifth-largest supplier, according to data from Japan's Ministry of Finance.

Two buyers

A Kyushu Electric spokesperson told S&P Global Commodity Insights that Sakhalin Energy has asked the company to change its settlement bank to a non-Russian bank.

"At this moment, we have received a request to change our payment settlement bank from the seller; however, we have not received any request to make payments in rubles," the spokesperson said.

The request Kyushu Electric received was to change its settlement bank to a non-Russian bank, the spokesperson said, declining to elaborate further.

"We will consider our response by holding close consultation with the government, financial institutions and relevant parties as necessary on this matter," the spokesperson said.

Kyushu Electric, which relied on Russian LNG for 23% of its LNG procurements for power generation in fiscal year 2021-22 (April-March), procures about 500,000 mt/year of Sakhalin 2 LNG on a long-term contractual basis.

The news that at least one Japanese lifter of Sakhalin 2 LNG has been asked to change its settlement bank to a non-Russian bank came to light as key Russian banks have been disconnected from the SWIFT global financial messaging system as part of Western sanctions against Moscow in the wake of the Ukraine invasion.

Tohoku Electric has also received a request from Sakhalin Energy to change its payment account to a designated account, Hiroki Nikaido, senior executive officer and Tokyo branch office general manager, told reporters.

"We have received a notice from the seller to change our payment account to a designated account," Nikaido told an earnings press briefing in Tokyo.

Tohoku Electric relies on Russian LNG for about 10% of its LNG procurement.

Officials from JERA, Tokyo Gas and Osaka Gas, Japan's other Sakhalin 2 LNG buyers, declined to comment on reported requests from Sakhalin Energy.

Heightened concerns

The requests to the Japanese lifters come amid heightened concerns in Japan over potential LNG supply disruptions after Russia on June 30 issued a decree to transfer all rights and obligations held by Sakhalin Energy to a new Russian entity.

The decree stipulates existing stakeholders have one month to submit their approval for the transfer of stakes to the newly created company, after which the government will rule on the admissibility of the submissions. However, to date there has been no confirmation of this Russian entity being set up.

Over half of the 9.6 million mt/year LNG production capacity at the Sakhalin 2 project at Yuzhno-Sakhalinsk in Russia, in which Japan's Mitsui has a 12.5% stake and Mitsubishi 10%, is committed to Japanese offtakers.

Officials from Mitsui and Mitsubishi declined to comment July 29 on the request from Sakhalin Energy.

The notifications indicate that the sale of LNG to contracted offtakers in Asia Pacific is likely to continue for the time being, and the proposed change in the ownership structure of the project is a separate issue.

Mitsubishi and Mitsui have not yet clarified their positions on ownership in the new entity, and it remains to be seen how Russia's complete takeover of the project will affect future outcomes.

However, the creation of a new entity potentially requires the transfer of contracts or the signing of new deals to accommodate the change in ownership, even if the customers are the same. Such technicalities could get caught up in the increasingly complex sanctions regime, and are driving some of the uncertainty in the market, according to market participants.

List of Sakhalin 2 LNG supply contracts:

*Tokyo Gas, 1.1 million mt/year, 24 years

*JERA, 2 million mt/year, 15-20 years

*Hiroshima Gas, 0.214 million mt/year, 20 years

*Kyushu Electric Power, 0.5 million mt/year, 22 years

*Toho Gas, 0.5 million mt/year, 24 years

*Tohoku Electric Power, 0.42 million mt/year, 20 years

*Saibu Gas, 0.065 million mt/year, 13 years

*Osaka Gas, 0.2 million mt/year, 23 years

*Korea Gas, 1.5 million mt/year, 20 years

*Shell, 1 million mt/year, 19 years

*Gazprom, 1 million mt/year, 20 years

*CPC, 0.75 million mt/year, 5 years (ended 2022)

Source: Japan Oil, Gas and Metals National Corp.