By: Masumi Motomura, chief researcher at Japan Oil, Gas and Metals National Corporation (JOGMEC)

Japan’s Prime Minister Abe and Russia’s President Putin will hold a summit meeting in December. The timing is perfect, as more than ten years of effort in energy cooperation are now starting to bear fruit.

In early September, Prime Minister Abe and a group of roughly 250 people from Japanese industry flew to Vladivostok to participate in the second Eastern Economic Forum hosted by President Putin. There, Japan and Russia reached a number of agreements on various projects. Mitsui & Co. announced that it will invest one billion dollars in the “Sakhalin-3” LNG project, which they are currently evaluating. Japan Bank for International Cooperation (JBIC) and a Russian gas company, Novatek, exchanged memorandums on loans that will total 200 million dollars. Novatek is a stakeholder of Yamal LNG that operates on the Yamal Peninsula in Northern Russia. (Table 1)

Including projects involving urban infrastructure, a total of 20 contracts were signed by the two sides. The eight-point economic cooperation plan that was proposed by Abe during the Sochi meeting in May is now taking concrete form at a very quick pace.

Table 1

Energy projects Japan and Russia agreed on at

the Eastern Economic Forum in September

Note: RusHydro is Russia’s state-run power company. Gazprom is a state-run LNG company. Novatek is a Russian gas company. JBIC is Japan Bank for International Cooperation.

Source: JOGMEC (Japan Oil, Gas, Metals National Corporation)

Selling oil to the East

In the past, Russia was looking to the West in search of business partners and export destinations for its oil. Now the country is turning to the East. In May 2004, President Putin announced his intention to embrace relationships with Asian neighbors in the state of the union message. In the autumn of 2006, Russia started exporting oil from Sakhalin-1. In 2009, it initiated shipment of East Siberian crude from Kozmino terminal located east of Nakhotoka in Russia’s Far East.

In 2011, a new pipeline opened that stretches from East Siberia across the Amur River to reach Daqing (Heilongjiang province) in China. In 2012, another pipeline opened that carries Siberian oil to the Pacific, called ESPO (East Siberia-Pacific Oil Pipeline).

Today, one million barrels travel eastward from Russia daily. The amount constitutes 20% of Russia’s oil exports. This clearly shows the “eastern shift” of Russia’s energy policy. As for Japan, 8.5% of its oil imports in 2015 were from Russia.

Under the sanctions imposed by the West on Russia, which were touched off by the Ukrainian issue, Russia’s oil and gas industry has been feeling a considerable squeeze. Improving relationships with its Asian neighbors will help mitigate the sanctions’ pressure on the economy. Russia’s largest state-run oil company Rosneft has already secured a long-term oil supply contract with China. For this, China is making the payments in advance, easing Russia’s present currency shortfalls caused by the sanctions.

During the Cold War, some countries, such as India and Vietnam, did not possess sufficient dollar reserves, preventing them from purchasing oil as they needed. When that happened, the Soviet Union exported oil to them in a barter trade. These countries, in other words, were like one-time “East European satellites behind the scenes.” (Table 2)

A long time after the collapse of the Soviet Union, the close relationships in the past are reviving. After Sakhalin-1, India participated in the development of Sakhalin-2 oil fields. India had a Russian oil giant, Rosneft, take a stake in its domestic refinery, and signed a long-term oil supply contract. Indonesia and Thailand are also strengthening their energy relations with Russia.

Table 2

Crude oil export contracts reached

by Rosneft and Chinese companies

Note: Daqing branch line is a pipeline connecting East Siberia and Daqing in China. Kozmino oil terminal is located in a port in the Russian Far East.

Source: JOGMEC (from news reports)

*China National Petroleum Corporation

**China Petrochemical Corporation

Eyeing Japanese LNG market

Russia’s growing interest in Japan is a part of its overall Asian emphasis. But Japan holds a special place in Russian strategy as Japan invests in Russia’s development of natural resources, and it provides technologies Russia does not possess. Sakhalin-2, built by Chiyoda Corporation and Toyo Engineering Corporation, has been running without a hitch for seven years since its operation started.

Japan is also an attractive client for Russia. In 2011, the day after the Fukushima Daiichi nuclear accident, Putin instructed officials to boost Japan-bound LNG exports from Sakhalin-2, anticipating that Japan would sustain a significant shortage of electric power as a consequence of shutting down many of its nuclear power plants in the aftermath of the disaster, and that Japan would have to turn to gas-fired power generation. With a long-term plan in mind for increasing Russia’s share of Japan’s LNG market, Putin wanted to impress upon Japan that Russia is capable of boosting its LNG supply on short notice in case of an emergency.

Energy cooperation between Japan and Russia will accelerate from now on. The speed may be even faster in the area of LNG, in which Japan has expertise. Although the current prolonged low price in oil markets will be discouraging for Japanese corporations in business to develop oil resources, this same circumstance will force Russia to present better deals for those who participate. The challenge will be worthwhile for companies aspiring to expand business opportunities. Japan’s issue is that only a limited number of companies have enough capital to willingly take on that challenge.