Due to the scarcity of domestic natural resources, the Japanese energy sector is almost completely dependent on imports, making it vulnerable to even minor changes in the global energy market. Roughly half of the Japanese crude oil imports come from Russia’s Sakhalin-1 and Sakhalin-2 projects, and almost all its LNG import from Russia is supplied by Sakhalin-2 alone. Therefore, having access to the geographically accessible Sakhalin projects has been extremely beneficial for Japan in procuring energy; however, the concentrated nature of this energy supply based in a country that has a problematic history with Japan is also a threat to Japan’s energy security. Sakhalin Island is the largest island in Russia. It is north of the Japanese archipelago and is administered as part of the Sakhalin Oblast. Sakhalin is situated in the Pacific Ocean, sandwiched between the Sea of Okhotsk to the east and the Sea of Japan to the west.
After the Russian aggression toward Ukraine in February, countries started to keep their distance from Russian energy resources, and in February 2022, the British oil giant Shell announced that it would withdraw from the Sakhalin-2 project where it had a 27.5% of stake in the project. While in May 2022, Japanese Prime Minister Fumio Kishida announced that Japan would ban the imports of Russian oil as part of its sanctions over Russia’s invasion of Ukraine, he also stated that there would be no change in Japan’s policy regarding the Sakhalin-1 and Sakhalin-2 natural gas and oil projects.
Shortly thereafter, the Russian government announced that it would establish a new company to take over the operation of the Sakhalin-2 project, and President Vladimir Putin signed a decree on June 30th to replace the project’s ownership with a new Russian firm. The current stakeholders are Gazprom, a Russian largest gas firm with 50% stakes, and Japanese firms, Mitsui & Co. and Mitsubishi Corporation, with 12.5% and 10% stakes, respectively. The decree indicated that Gazprom would keep its share, while other shareholders would be required to reply to the government with their decisions within a month if they planned to hold onto their shares despite the new conditions. Japan stated that they would keep their interest in Sakhalin-2 on July 16th. However, it is still up to the Russian government to make the final decision regarding the stakeholders.
If Russia chooses to remove Japan from Sakhalin-2, it will push Japan to compete with Europe for alternative energy supplies even more. The announcement of the decree has forced Japan to consider replacing Russian supply with other sources, and Japan has already been in discussion with the US and Australian government officials about alternative energy sources. The spot market is also a viable alternative, but LNG in the spot market is more expensive than that of Sakhalin-2, and spot purchasing could result in further price increases for gas and electricity in Japan.
Japanese energy companies are struggling to respond to the situation. Hiroshima Gas, which imports 50% of its LNG from Sakhalin-2, said it is gathering information. Tohoku Electric Power, which buys 10% of its LNG from Sakhalin-2, stated that they are considering other options if the imports are suspended.
Since LNG is a relatively clean energy source in the Japanese current energy mix, maintaining the stability of its sourcing with supply from diverse sources is considered vital for Japan to achieve its goal of becoming carbon neutral by 2050. If the further moves by Russia force Japan to find alternative supplies, electricity price increases could threaten Japanese economic stability in the short and mid-term. However, it might also accelerate the Japanese movement toward replacing nonrenewable energy sources with renewable ones in the long run, which can positively affect keeping its long-term carbon-neutral promise.
This Post was submitted by Climate Scorecard Japan Country Manager James Hawrylak