Russian Prime Minister Mikhail Mishustin has signed a resolution that orders ministries and agencies to start moving forward with creating a new entity to replace the operator of the Sakhalin 2 oil and gas development project in the country’s far east.

The 41-page resolution says that the outfit to be named Sakhalin Energy will be a limited liability company registered in the city of Yuzhno-Sakhalinsk, the capital of Sakhalin Island.

It will take over responsibility and the properties of current operator, Sakhalin Energy Investment that was incorporated in Bermuda in 1994 ahead of the signing of a production sharing agreement between the group of western investors, led by Shell, and the Russian government.

The resolution follows a decree signed by President Vladimir Putin on 30 June that established a general framework for authorities to take full state control over the project, which operates Russia's first liquefied natural gas project that is located in the south of Sakhalin Island.

According to the document, Russian state gas giant Gazprom will receive a stake of just over 50% in the new firm.

The operator will hold the remaining shareholding of almost 49% to permit Sakhalin 2 foreign investors to apply to the government to obtain stakes of the same size that they had in the previous operating company.

Former Sakhalin 2 operator Shell holds a 27.5% shareholding although the company earlier announced a plan to divest it in response to Russia’s invasion of Ukraine and the international sanctions that followed.

Japan’s Mitsui and Mitsubishi have stakes of 12.5% and 10% in the development. Both companies earlier this week cut the value of their stakes in the Sakhalin 2 by 217.7 billion yen (US$1.66 billion).

“It is possible that the value fluctuates further depending on the situation,” Mitsubishi chief financial officer Yuzo Nouchi said at a news conference on company’s second quarter earnings.

The three shareholders have just one month after the new operator is formally incorporated in Yuzhno-Sakhalinsk to file applications to regain their shareholdings in Sakhalin 2, but without any guarantee the government would agree to award stakes of a similar size.

If any foreign shareholder fails to renew its stake in the project within the allocated timeframe, authorities will have the right to sell these shares to a Russian investor in the following four months.

The resolution also says that the new operator will automatically re-employ its current staff, and the new operator will be still chaired by executive director Andrey Oleynikov. The document also charges him with supervising incorporation of the new operator.

“We will properly deal with the situation following consultations with the Japanese government and project partners,” Mitsui chief financial officer Tetsuya Shigeta said, according to Reuters.

A Shell spokesperson has pointed to the following remarks by company's chief executive officer Ben van Beurden during the second quarter 2022 conference call. He said, "It is highly unlikely that we will buy into a Russian entity if the interests that we have in Sakhalin Energy are being transitioned to that. That is not in line with our intentions to leave our asset position in Russia."

Besides detailed instructions to Russian ministries, the resolution also contains the statute of the new operator, instructions on auditing the outgoing operator, and procedures for evaluating and selling off unclaimed shares to Russian investors.

According to Russia’s Energy Ministry, the Sakhalin 2 project last year produced about 82,000 barrels per day of oil, while total gas output for 2021 was reported at 16.8 billion cubic metres.

* The story has been updated to include the response from Shell.