“Japan will not get any oil or gas from Russia and will not participate in the Sakhalin-2 LNG project.” With that prospect, Russian former president and former prime minister Dmitry Medvedev this week terrified Japan. The East Asian major buyer of Russian gas is already struggling with tight energy supplies. Now, to make matters worse, Tokyo sees billions of investments in the gas and oil fields of the Siberian Sakhalin evaporate. That Russian island is located a few kilometers from the northernmost point of Japan.
Japan’s sanctions against Russia are in line with European and American sanctions, excluding energy. Japan bans new investment in Russia’s LNG sector and boycotts Russian coal, but stalling Russian oil is more difficult and Russia’s gas tap keeps Japan open. It is completely out of the question to leave the gas extraction in Sakhalin, in which Japanese companies have a minority interest of 22.5 percent.
Japan, which itself has hardly any fossil fuels, is going out like a candle without imported energy. After the oil crisis in the 1970s, Japan turned to nuclear energy and liquefied natural gas (LNG). LNG became dominant after the major earthquake in 2011, when nuclear power became less popular due to the nuclear disaster in Fukushima. With LNG making up 24 percent of the energy mix, Japan is the world’s third largest importer of LNG. More than 9 percent of this comes from Russia, mainly from Sakhalin.
No major Russian gas project without the Japanese joining in. A Japanese development bank and trading house Mitsui are already losing money on Arctic LNG2, a Russian gas project in the Arctic that will supply European and Asian gas markets with LNG from 2023 by ship via the Northern Sea Route. Now that parts for the machines are more difficult to obtain due to international sanctions and Europe wants to get rid of Russian gas, that future is doubtful.
shell
Now Japan threatens to run out of gas from Sakhalin amid Russian anger over a plan by the G7 — the rich industrialized nations’ club — for a price cap on Russian fossil fuels. Such an international price ceiling gives the existing sanctions against Russia more clout, according to Kishida in a recent speech, because Russia then earns less from oil and gas exports.
Moscow hit back by last week, by decree of Russian President Vladimir Putin, transferring Sakhalin 2, entirely devoted to gas extraction, to a new owner.
Last week, Moscow turned the thumbs up by transferring Sakhalin 2, entirely devoted to gas extraction, to a new owner. Foreign companies in the Sakhalin gas consortium, such as Shell and Mitsui, must decide within a month whether they want to keep their shares in the new ownership structure. Then they have to ask permission from the Russian government. The alternative is to sell the interests.
For Shell, a 27.5 percent shareholder, this is not a difficult decision: despite the Sakhalin-2 project representing 4 percent of the global LNG market, Shell has already said it will withdraw. However, Mitsui and Mitsubishi, Japanese companies that own 12.5 percent and 10 percent respectively of Sakhalin 2, don’t budge, because more than half of the gas that is extracted there goes to Japan.
The attachment to Sakhalin goes so far that Japan’s economy minister Hagiuda Koichi said in May that Japanese shareholders will not give up even if the Russian government asks for their departure. Kishida hastily stated that Putin’s Sakhalin decree does not change the long-term agreements on gas supplies. Medvedev helped him out of the dream.
37 degrees in Tokyo
Sakhalin is the last straw for Japan, which has already noticed that its oil and gas supplies are not in order during a recent heat wave. To prevent people from succumbing to the highest temperatures recorded by Japanese meteorologists in the past 147 years, air conditioners were allowed to stay on. But escalators in train stations and lights in amusement parks were turned off and factories switched to shorter working days.
This inconvenience is dwarfed by future energy problems if the country actually runs out of Russian gas. In addition, Japan has another compelling reason not to sell its stake in Sakhalin: China, Russia’s partner and Japan’s major competitor and rival. Chinese state energy companies are hot on Japan’s heels in Russian gas projects: they already own a 20 percent stake in Arctic LNG2, and are eager to fill the gap left by a Japanese exit from Sakhalin. That is a great opportunity for China to gain a lead over Japan for next to nothing.
The fact that it concerns Sakhalin, with which Japan has special historical ties, is particularly sensitive. From 1905 to 1945 Sakhalin was part or all of a Japanese colony under the name Karafuto, where Japan conducted exploratory drilling for oil. After Japan lost World War II, the northern half of Sakhalin went to the Soviet Union. Moscow and Tokyo are still at odds over a nearby group of islands, the Kuril Islands.
However, Japan has spent decades trying to improve relations with Russia and does not want to hand over its carefully built interests in gas and oil extraction to the Chinese. Even as the Russians push for a Japanese exit from Sakhalin, Tokyo will cling to Russian gas, albeit with the courage of despair.