The supply of liquefied natural gas to the world’s third largest economy is in jeopardy. While Japan is participating in Western sanctions against Russia following its military intervention in Ukraine, Moscow has made it clear to Tokyo that its participation in the Sakhalin II project is not a given.
Japan is the fourth largest exporting country in the world after China, the United States and Germany. Its economy is heavily dependent on its access to abundant and cheap energy to manufacture vehicles, machinery and electronic equipment.
Like all developed nations, Japan’s energy policy attempts to balance access to cheap energy, security of supply and the reduction of GHG emissions.
Japan’s energy security is fundamental because as an island, the country has limited natural resources and lacks international pipelines and electrical connections.
According to the International Energy Agency, the country produced 30% of its electricity from nuclear power until 2011. The Fukushima nuclear disaster led to a total suspension of the nuclear fleet. The latter has only partially restarted and now produces less than 10% of the country’s electricity, making Japan more dependent on fossil fuels.
Dependence on imported fossil fuels reached 94% of energy supply in 2014. Several factors such as the restart of nuclear power, the expansion of renewable energy and the decrease in energy demand have reduced this share to 88% in 2019. This is still the worst self-sufficiency rate among IEA member countries after Luxembourg.
Natural gas plays a critical role in energy supply in Japan, representing the largest energy source in electricity generation. With domestic production being limited, Japan imports nearly all of its natural gas in the form of liquefied natural gas (LNG).
Japan is the world’s largest LNG importer, accounting for 22% of global trade in 2019. About 10% of LNG imports come from Russia, specifically from Sakhalin 2.
Japan’s total primary energy supply by source
The Sakhalin-2 project
The Sakhalin-2 project, located on the Sakhalin Island is one of the biggest integrated oil and LNG projects in the world. It also represents the first offshore gas project and the first LNG plant in Russia.
Before the military operation in Ukraine, the project was operated by Sakhalin Energy Investment Company Ltd, a joint venture between the Russian state-owned Gazprom (50%), the British company Shell (27.5%), and the Japanese companies Mitsui (12.5%) and Mitsubishi (10%).
The project infrastructure includes three offshore platforms, an onshore processing facility, 300 kilometres of offshore pipelines and 1,600 kilometres of onshore pipelines, an oil export terminal and a liquefied natural gas plant.
The LNG plant was officially inaugurated on February 18, 2009 and the first cargo began its journey to Japan in March 2009. The project produces 10 million tons of LNG per year, or 4% of the current global liquefied natural gas market, of which six million tons are shipped to Japan.
The Sakhalin-2 project is of great importance to Tokyo, particularly because of its geographical proximity. While LNG tankers can take more than two weeks from Qatar and three weeks from the United States to reach East Asia, Sakhalin LNG tankers can arrive in a few days.
The Sakhalin-2 project supplies LNG to the Asia-Pacific region
Tensions are rising between Moscow and Tokyo
In late February, Shell announced its intention to withdraw from the project following the Russian military intervention in Ukraine.
For their part, Japanese companies Mitsui and Mitsubishi have maintained their stakes in the gas project while Japan participates in Western sanctions against Russia by banning the export of goods that could support the development of Russian industry.
Recently, the country also openly discussed with the G7 to cap the price of Russian oil exports at half the current rate, which of course irritated Moscow.
On June 30, Russian President Vladimir Putin signed a decree to transfer all assets and rights of the Sakhalin project from foreign to Russian jurisdiction. A Russian limited liability company will be formed to control all assets of the project. The foreign shareholders have one month to decide whether they will remain in the project. If so, they will join the capital of the new company with the same shareholdings. Otherwise, they will lose their assets.
Putin’s decision caused shares of Japanese companies Mitsubishi and Mitsui to fall 6% immediately after the news broke earlier this month. The Japanese government has openly asked Japanese companies to make the transfer.
Currently, it is very difficult to replace this gas. Neither Qatar, Australia nor the United States currently have significant volumes of LNG available. Liquefied natural gas is a scarce commodity and finding consumers is not a problem.
Reuters reports on July 19 that Japan’s Nippon Steel Corp, the world’s second largest steelmaker, has purchased a cargo of LNG at the highest price ever paid in the country.
The signal sent by Moscow seems clear: Tokyo must stop imposing ever more sanctions on Russia if it wishes to maintain its energy security.
Vladimir Putin signs the decree to create the new company
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