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Russia move on Sakhalin-2 thrusts Japan into an energy dilemma

  • July 2, 2022
  • , Nikkei Asia , 3:04 a.m.
  • English Press

DAISUKE SUZUKI, Nikkei staff writer


TOKYO — Russia’s decision to wrest control of the Sakhalin-2 energy project has brought Japan closer to losing a valuable fuel supply right at a time when the country’s electrical grid can least afford it.


Russian President Vladimir Putin signed an order Thursday mandating Sakhalin-2 assets be transferred to a newly established Russian company. The oil and natural gas development project in Russia’s Far East, which includes Japanese trading houses Mitsui & Co. and Mitsubishi Corp. as investors, accounts for about 10% of Japan’s liquefied natural gas imports.


“We need to closely monitor what the presidential order requires on the terms of the contracts,” Japanese Prime Minister Fumio Kishida said Friday. “We’ll communicate closely with operators and plan our response.”


Under Putin’s order, a new company will be set up to operate Sakhalin-2’s new operating entity. Foreign investors will need to notify Moscow within a month after the company is set up as to whether they want shares in it. If not, they will be forced to sell their stakes with the proceeds going to Russian accounts that cannot be withdrawn.


There are three responses Japan can take, all with drawbacks.


The trading houses could agree to take stakes in the new company. Mitsui & Co. and Mitsubishi have stakes of 12.5% and 10%, respectively, in the current venture. But if they choose to buy into the new operating company, there is no guarantee of the size of those stakes or what the new ownership structure would be. 


Another option would be for the trading houses not to take stakes in the new company, but Japan would maintain contracts to buy LNG from the project. Japanese energy importer JERA struck a 20-year deal in 2009 for Sakhalin-2 to supply over 1.5 million tons of fuel per year.


Usually this would not be an issue. Contracts like this normally remain enforce when there are changes in ownership. But Russia has placed Japan on a list of “unfriendly countries,” so uncertainty remains.


Finally, there is the worst case scenario — Japan does not invest in the new operator and the contracts are terminated. That would deal a sharp blow to Japan’s energy security since LNG supplies would immediately drop just as the country is experiencing a power crunch brought on by a heat wave, along with rising utility bills.


Japanese energy companies are scrambling to respond to the situation. Hiroshima Gas buys about 50% of LNG imports from Sakhalin-2 and said it is gathering information.


Tohoku Electric Power, which buys about 10% of the LNG from Sakhalin-2, said it has started to consider options in case imports are suddenly disrupted.


The spot market is the only alternate source if Sakhalin-2 LNG is cut off. Under the current long-term contracts, Sakhalin-2 gas is relatively cheap, estimated at about $10 per million British thermal units.


LNG is more expensive on the spot market. Depending on import volumes and currency levels, the extra costs could add up to as much as 2 trillion yen ($14.78 billion) a year to replace Sakhalin-2’s LNG.


Putin seemed to time the presidential order just after the close of the NATO summit on Thursday. If Japan moves to safeguard its interests in Sakhalin-2, it may drive a wedge in the united front presented by Group of Seven nations.


But if Japan decided to exit Sakhalin-2, LNG supplies would be unstable. Moscow seems to be calculating that no matter which direction Tokyo takes, the outcome provides Russia with leverage to use against the West. 

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