As the Russian government has decided to effectively seize the Sakhalin-2 oil and natural gas development project, it is becoming increasingly unclear whether major Japanese trading houses can retain their interests in the project in the Russian Far East. 

Without stable liquefied natural gas supply from the project, Japan will have no choice but to find an alternative supply option amid soaring LNG prices triggered by Russia’s invasion of Ukraine. This could lead to a further rise in electricity and gas bills in Japan.

Major Japanese traders Mitsui & Co. and Mitsubishi Corp. have held stakes of 12.5 pct and 10 pct, respectively, in Sakhalin Energy Investment Co., the operator of Sakhalin-2.

Sakhalin-2 produces 10 million tons a year of LNG, and around 6 million tons of the annual output has been shipped to Japan, accounting for almost all of Japan’s LNG imports from Russia. Japan Relies on Russia for 9 pct of its gas procurement.

“It’s not that we will immediately lose imports from Sakhalin-2,” industry minister Koichi Hagiuda told a press conference on Friday.

The minister, however, indicated that the government is working to secure supplementary supplies, from the United States and Australia. “We’ll take appropriate measures in case of unforeseeable circumstances,” he said.

Amid Western moves to strengthen sanctions against Russia following its military aggression on Ukraine, British oil giant Shell PLC has announced its plan to pull the plug on its 27.5 pct stake in the Sakhalin-2 project.

Meanwhile, Japanese Prime Minister Fumio Kishida has noted that the government has not changed its policy of maintaining the country’s interests in the oil and gas project.

The government regards the Sakhalin-2 project as an indispensable energy source for electricity and gas distribution in Japan while the country is highly dependent on the Middle East for energy.

If Japan cannot procure LNG from Sakhalin-2 under a long-term contract, it will be forced to turn to the spot LNG market instead.

At a time when countries around the world are competing for LNG, with European nations seeking to reduce their heavy reliance on Russia for natural gas, Japan might be unable to secure enough LNG in the spot market.

Furthermore, spot prices are about twice the price of LNG from Sakhalin-2 under Japan’s long-term contract, Japanese industry ministry officials said.

Mitsui and Mitsubishi may still be able to invest in a new company that will take over the Sakhalin-2 project from Sakhalin Energy Investment, if they meet the Russian government’s requirements.

However, meeting Russia’s requirements is likely to be not easy. “We may be asked to ease sanctions against Russia in return,” a source on the Japanese side said.

JIJI Press