Japan Institute for National Fundamentals
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Speaking out

Masahiko Hosokawa

【#898】Japan Should Not Withdraw from Sakhalin Projects

Masahiko Hosokawa ／ 2022.03.16 (Wed)


March 14, 2022

　
The United States has decided to ban oil and natural gas imports from Russia. The Biden administration responded to U.S. public opinion and Congressional requests, concluding that it would be important to cut off funding sources for Russia that has invaded Ukraine. While international cooperation is important, Japan should not easily join the U.S. embargo if it would affect Japan’s stable energy supply. Japan should make a cool decision on its own energy security.

Meanwhile, British international oil companies BP and Shell have decided to withdraw from Russian oil and natural gas projects. Shell will pull out from the Sakhalin 2 natural gas project on the Far Eastern island in response to pressure from the market and investors. Japanese trading companies participate in the Sakhalin 2 project. Japan, including the government, has also taken part in the Sakhalin 1 project to produce crude oil. How should Japan respond to international oil companies’ withdrawal from Russian energy projects?

Energy security should be given priority

Questioned about Japanese companies’ potential withdrawal from the Sakhalin 1 and 2 projects, Japanese Economy, Trade and Industry Minister Koichi Hagiuda told the National Diet that if a third country bought Japanese stakes in the projects, the sanction would not be effective. It is natural to conclude that given Japan’s vulnerable energy security, Japanese companies should not pull out from the Sakhalin projects.

Russia provides 9% of Japan’s total natural gas imports. Some 90% of Russian natural gas imports into Japan (8% of the total) are from Sakhalin. Natural gas is used for power generation, having a closer link to stable electricity supply than crude oil. In the winter of 2021, Japan saw a power outage risk. The winter power supply-demand balance has also been tight this winter, indicating a tightrope situation. If natural gas supply from Sakhalin is disrupted, Japan may have to be prepared for power outage. Japanese companies’ natural gas supply from Sakhalin has a direct bearing on Japan’s energy security. This is the reason Japan’s private and public sectors have cooperated in promoting the Sakhalin projects.

Shell does not supply Sakhalin natura gas to its home countries Britain and the Netherlands. It sells such gas to China and India, as well as to Japan. Europe is not in the same position as Japan whose energy security is directly linked to Sakhalin natural gas.

China may take advantage of Japan’s withdrawal

If Japanese companies withdraw from the Sakhalin projects, China may acquire stakes there at discount prices, as indicated by Minister Hagiuda. China would obtain fruit from the massive projects where Japan’s government and private sectors have taken risks in developing them. China may thus be profiting while the West and Russia fight.

Japan was forced to withdraw from Iran’s Azadegan oilfield in the past under pressure from the United States as a part of sanctions against Iran. Then, China took advantage of Japan’s withdrawal to acquire stakes in the oilfield. We should learn lessons from history.

Masahiko Hosokawa is a professor at Meisei University and a former director-general of the Trade Control Department at Japan’s Ministry of Economy, Trade and Industry. He is also a Planning Committee member at the Japan Institute for National Fundamentals.