Japan holds on to gas interests in Russia’s Sakhalin, wary of China taking them

The Yomiuri Shimbun

18:37 JST, March 27, 2022

Even amid Russia’s invasion of Ukraine, the Japanese government intends for the time being to maintain its interests in energy projects in the Russian Far East island of Sakhalin.

If Japan were to withdraw from the island, the government believes China would be the likely nation to take over the interests, effectively undermining the sanctions imposed on Russia.

It will be difficult to regain oil and gas interests once they have been relinquished, so Tokyo aims to avoid creating a situation where the cost of procuring energy increases and are added onto electricity and gas bills.

During the International Energy Agency’s two-day ministerial meeting in Paris through Thursday, participants discussed ways to reduce dependence on Russian crude oil and natural gas.

“We confirmed that each country will do what they can under different circumstances,” said Economy, Trade and Industry Minister Koichi Hagiuda.

The United States and the United Kingdom, which are less dependent on Russian energy, are making their stance clear on severing ties with Russia. Exxon Mobil of the United States, which held a stake in the Sakhalin 1 energy development project, and Britain’s Shell, which held a stake in the Sakhalin 2 project, announced their withdrawal. Japanese companies continue to participate in both projects.

Germany, on the other hand, which relies on Russia for half of its natural gas imports through pipelines, is among the countries that intend to continue imports for the time being.

While Japan with its very limited natural resources agrees with the policy of reducing dependence on Russia over the medium to long term, it is difficult to immediately make a shift.

From the Sakhalin 2 project Hiroshima Gas Co. imports about 50% of its liquefied natural gas and Toho Gas Co. about 20% of its LNG, so any disruption in the supply would have a significant impact on their businesses.

“Obviously, we need to consider reducing our dependence [on Russia],” said Japan Gas Association Chairman Takehiro Honjo, who is also chairman of Osaka Gas Co. “But I can’t come up with any names [of alternative suppliers] right away.”

Russia has been trying to intimidate “unfriendly” countries such as Japan, the United States and several in Europe by demanding payment in rubles for natural gas purchases. However, if Japan withdraws from the Sakhalin 2 project, the cost of procuring LNG will increase, which could lead to higher electricity and gas bills using it as an energy source.

“Japan would have no choice but to procure energy on the spot market to compensate for the decrease, resulting in an annual cost increase of more than ¥1 trillion on the Japanese side,” estimated Prof. Masahiko Hosokawa of Meisei University, an expert on energy.

Bitter lesson

Japan had been the world’s largest LNG importer, until China took the top spot in 2021. China is shifting away from coal in an effort to decarbonize the country by increasing power generation using natural gas, which has relatively low carbon dioxide emissions.

In an effort to expand China’s supply sources, Chinese companies have invested in the Arctic LNG 2 project in which Japan is also participating. In 2019, China began importing natural gas from Russia via pipeline.

“China’s economy requires an enormous amount of energy to sustain itself,” said Homare Endo, director of the Global Research Institute on Chinese Issues. “China must have a strong desire for Japan’s interests.”

Japan’s reluctance to withdraw from the Sakhalin projects perhaps shows it is learning its lesson from a bitter experience.

In 2010, Inpex Corp., which is partially owned by the Japanese government, withdrew from the development of the Azadegan oil field in southwestern Iran, one of the largest oil reserves in the Middle East. The Japanese side was forced to make a difficult decision because of the fear that it would not be able to receive loans from U.S. financial institutions if it were subject to sanctions imposed on Iran by the U.S. government.

The Japanese side had already invested ¥12.5 billion in the project but returned its 10% stake in the project to the National Iranian Oil Company without charge. The stake was then transferred to state-owned China National Petroleum Corp.

“Sakhalin is an important project for Japan’s energy security,” a Japanese government source said. “If Japan were to give up its interests and then to have China take them, only Japan will suffer damage.”