Editor’s Note (July 1, 2022): After The Economist went to the press Vladimir Putin ordered the nationalization of the Sakhalin-II natural gas project “to defend [Russia’s] national interests.” Japan’s government later said it did not believe this would endanger Sakhalin’s gas supply.
Thello iceland Sakhalin, anchored between Japan and Russia just north of Hokkaido and west of the Kamchatka Peninsula, has historically been the site of conflict between the two North Asian neighbors. Today, as the home of two massive fossil fuel projects, it symbolizes an uneasy Russo-Japanese peace and, since Russia invaded Ukraine in February, a sore point in relations between Japan and its Western allies.
The two projects, Sakhalin-I and Sakhalin-II, attracted energy companies from the United States, Britain and India, as well as from Japan and Russia. However, shortly after Vladimir Putin’s tanks entered Ukraine, ExxonMobil, an American giant, pledged to divest its 30% stake in Sakhalin-I and Shell, a British rival, said it would divest its stake. 27.5% in Sakhalin-II.
Not the Japanese. Sakhalin Oil and Gas Development Company, a public-private partnership, will take 30% of oil producer Sakhalin-I; two large trading houses, Mitsui and Mitsubishi, will retain their 12.5% and 10%, respectively, of Sakhalin-II, which pumps liquefied natural gas (length). The Tokyo government has no problem with that. In May, Economy Minister Hagiuda Koichi declared that Japanese shareholders would not leave even if the Russian government asked them to.
Japan’s approach seems misplaced. In other cases, the country’s position vis-à-vis Russia has mirrored that of America and Europe. In June, the Japan Bank for International Cooperation, a state-owned lender, extended its freeze, introduced in March, on the financing of Russian natural gas projects in the Arctic. Private sector financial firms have cut ties with their Russian counterparts. Exports to Russia of high-performance machine tools, quantum computers, 3namely printers and other items have been blocked by Japanese sanctions.
Why then stay in Sakhalin? On the one hand, this avoids the mess Western project partners now find themselves in. Selling your holdings is easier said than done. ExxonMobil took a $3.4 billion writedown related to the project in the first quarter and Shell took a $1.6 billion charge. The war limits the number of potential buyers, mainly state-owned companies from countries that are neutral or friendly to Russia, such as Sinopec, China’s state-owned energy giant, or ngoc Videsh, the international arm of the Indian Oil and Natural Gas Corporation (which already owns 20% of Sakhalin-I). As forced sellers, ExxonMobil and Shell have a weak negotiating hand, which the Chinese and Indians would be happy to exploit.
Japan’s government does not like the prospect of disposing of Japanese assets in such a fire sale. It is particularly reluctant to hand over one of the world’s largest and most advanced gas projects to a Chinese competitor for a song. And unlike the investments by ExxonMobil and Shell, which followed a purely commercial logic that Western sanctions and the reputational risk of staying in Russia have severely undermined, he worries about energy security.
Archipelagic Japan has no oil pipelines or power grids connecting it with other countries. It is the world’s second largest importer of length. About 9% of its supply comes from Russia, with most of it produced on Sakhalin. This year, between 50% and 69% of Sakhalin-II’s monthly gas production went to Japan, according to Kpler, a data firm. “When the cold light of day falls, you have to think about the impact you are having on Russia versus the impact you are having on yourself,” sums up Yuriy Humber from Japan. Noan energy research firm in Tokyo.
Similar considerations are being aired in Germany, which gets more than half of its gas from Russia. But the German government wants to reduce its dependence on Russian oil and gas, the sale of which finances the campaign against Ukraine. Japan’s Prime Minister Kishida Fumio has spoken weakly about joining a Western embargo on Russian oil and has been silent on Russian gas. To Western ears, that silence sounds increasingly deafening. ■
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