The war between Russia and Ukraine broke out at the end of February, has not only changed the European geopolitical order but also transformed the rules of financial markets and the global energy game. In the first reaction to the war, European countries proclaimed their decision to halter energy imports from Russia. In this direction, the major objectives of the European Union (EU) countries have been to increase the diversity of energy sources and to ensure an accelerating transition to renewable resources.
Since the war, Japan has pursued a parallel policy with the United States of America (USA) and European countries in imposing sanctions on Russia. In addition to admitting alleged war crimes committed by Russian forces in Ukraine, Japan announced in April that it would follow the EU and Group of Seven (G7) countries and ban Russian coal imports.[1]
In this context, Japan finds itself in an energy dilemma. Japan has one of the lowest rates of self-energy sufficiency in the Organisation for Economic Co-operation and Development (OECD) at 11.2% in 2020.[2] Japan, a resource-poor island nation, is more vulnerable than any other country to changes in global energy markets created by the Russian-Ukrainian War. Besides, relations between Moscow and Tokyo, which were strained due to the Kuril Islands, further deteriorated after the war. Following Japan’s participation in Western sanctions against Russia, the Kremlin has decided to withdraw from negotiations on the peace treaty between Russia and Japan on the disputed islands.[3] While Japanese Prime Minister Fumio Kishida is clear about Russia’s invasion of Ukraine and where Japan stands in its territorial integrity, it remains unclear how exactly he plans to address the new energy dilemma facing Tokyo.
Japan, which has limited resources, highly depends on Russia for its natural gas requirements. Finding alternative sources in the midst of the global crisis is also posing a challenge for Japan. Therefore, unlike Western countries, Kishida is more reluctant to experience a complete disengagement with Moscow. While Tokyo remains committed to supporting the ongoing joint liquefied natural gas (LNG) project with Russia in the Sakhalin Region, has announced its decision to phase out coal and oil imports which is a lesser dependent sector to Russia.[4]
The natural gas resources of Japan have largely been met through LNG imports. LNG is of critical importance as it provides 36% of the country’s electricity according to 2021 data. Most of Japan’s LNG supply depends on a long-term contractual arrangement. In this context, in order to ensure energy security, Japanese trading companies Mitsubishi Corp. and Mitsui & Co should continue their investments in Sakhalin-2.
By threatening the rights of Japanese and European investors, Russian President Vladimir Putin has announced Russia’s plans to nationalize the “Sakhalin-2 Offshore Oil and Gas Project,” the world’s largest integrated, export-oriented first offshore oil and gas project in the Far East. [5] Almost all of the project’s gas exports, most of which transferred to Japan, South Korea and China, are sold under long-term contracts.
This decision of Putin also increases the risk of Sahalin-2 suspending the government’s contractual shipment of LNG to Japan by reason of Tokyo’s criticising the Kremlin for its decision to invade Ukraine. Therefore, Japan’s stake in the project, and thereby its energy security, is in limbo. This decision of Moscow has brought Japan closer to losing a valuable fuel supply at a time when the country’s electricity grid can least afford it.
Following these statements of the Kremlin, Tokyo announced that it would maintain its position in the Sakhalin-1 and Sakhalin-2 energy projects. In this context, this orientation of Japan can be explained for two reasons: First, Japan is much more dependent on foreign energy than the other G7 country and is not in a position to risk its energy supply. Second, Japan’s withdrawal from these two projects would cost Japan more than it would Russia. In this framework, Japan’s efforts to protect its shares in Russian oil and gas projects and its continued investment are the most reasonable options for the continuity of the energy supply.
However, after the G7 announced a cap on the price of crude oil exported from Russia, Kishida made a proposal that the upper limit would be placed at half the current price of Russian crude oil: [6]
“We have reached an agreement that the international community will establish a system in which the price of Russian oil will be capped at about half the current price, and the international community will not buy or allow the purchase of oil above that level.”
Given that Russian oil is already sold at a generally high discount compared to its alternatives, a further discount of half would bring oil revenue closer to the level that Russia uses for its federal budget. Following Kishida’s statement, the Kremlin criticized Japan for taking an “ unfriendly stance” toward Russia and said it would hinder the development of economic relations between the two countries, including energy. Russia’s former President Dmitry Medvedev has warned that global oil prices could exceed $300-400 per barrel if the ceiling price proposals are implemented. As a result of these price fluctuations, Medvedev said, Japan “will not buy oil or natural gas from Russia, and therefore it will not be able to participate in the Sahalin-2 LNG project.” [7]
Following Russia’s announcement, Japan faced the risk of losing its stake in Sahalin-2, which is critical to the country’s energy security. In this case, there are three scenarios in which Japan can ensure energy security:
First, it is possible to diversify the energy supply. However, this situation is unlikely to increase energy supplies to Japan in the short term due to the global natural gas market is already in the grip of supply shortages. The U.S. and Qatar, the world’s largest LNG suppliers, are trading at record levels amid intensifying competition for gas, as they are being diverted to European markets. Furthermore, Sahalin-2 is the closest LNG export facility to Japan, so importing supplies from new facilities will tie ships to longer journeys and cause extra congestion in supply chains that are already in danger. Depending on import volumes and currency levels, the extra costs to replace Sakhalin-2’s LNG could increase by as much as 2 trillion yen ($14.78 billion) per year. [8]
Secondly, it may be preferable to turn to sources other than natural gas. G-7 countries, including Japan, have taken steps to ban Russian coal shipments, which resulted in coal prices rising. Despite the high prices, turning to coal would not be a more sensible choice than LNG. On the other hand, the use of nuclear energy as an alternative source requires a change in the post-Fukushima safety rules that have traumatized the people of Japan. So, it does not seem possible for the public to support this situation.
The third and worst scenario would be Japan’s failure to invest in the new operator in Sahalin-2 and the termination of the contracts. Such a case may deal a sharp blow to Japan’s energy security. Because the failure of LNG supplies will be a catastrophe due to the ongoing nationwide electricity shortage and the high electricity bills.
To sum up, Japan is struggling with congested electricity supplies due to extreme weather, the retirement status of old power plants, and delays in restarting nuclear reactors. Any disruption to LNG shipments threatens to further expand their grid, risking power outages in some parts of the country. In addition, experiencing the first scenario mentioned above and, buying alternative and “expensive” LNG sources will increase electricity bills for consumers and businesses, while deepening inflation woes. In this context, the most logical of the scenarios will be to supply LNG from Sakhalin-2 and accordingly achieve a calm dynamic in trade relations with Russia, especially in energy.
On the other side, Japan’s efforts to calm its relations with Russia will create a contradiction among the G7 countries that have vowed to wipe Russia off the markets and will result in extra pressure on Japan. In such a case, Japan is expected to prefer either security of energy supply or cooperation with the G7 countries. However, just as the EU grants exemptions from sanctions to countries dependent on Russian energy such as Hungary, Slovakia and the Czech Republic, Japan can get the approval of the G7 countries with the right approach. Thus, it will both ensure the security of the energy supply and allow it to follow the Western countries that acted as a bloc after the Russian-Ukrainian War.
[1] “Japan Hits Russia and Belarus with More Sanctions Over Ukraine Envasın”, Japan Times,
https://www.japantimes.co.jp/news/2022/03/08/national/japan-russia-belarus-sanctions-ukraine/, (Date of Accession: 05.07.2022).
[2] Catharina Klein, “Self-Sufficiency Rate of Primary Energy in Japan From Fiscal Year 2011 to 2020, Statisca,
https://www.statista.com/statistics/1116602/japan-primary-energy-self-sufficiency-rate/ (Date of Accession: 05.07.2022).
[3] “Russia Halts Peace Treaty Talks with Japan Over Sanctions”, Nikkei Asia, https://asia.nikkei.com/Politics/International-relations/Russia-halts-peace-treaty-talks-with-Japan-over-sanctions (Date of Accession: 05.07.2022).
[4] “Japan to Take Time Phasing Out Russian Oil İmports, Says PM Kishida”, Reuters, https://www.reuters.com/world/asia-pacific/japan-ban-russian-oil-imports-in-principle-pm-kishida-2022-05-08/ (Date of Accession: 05.07.2022).
[5] “Russia transfers Sakhalin-2 to new operator without compensation”, Nikkei Asia, https://asia.nikkei.com/Politics/International-relations/Russia-transfers-Sakhalin-2-to-new-operator-without-compensation, (Date of Accession: 06.07.2022).
[6] “Kremlin Slams Japan’s ‘Unfriendly’ Stance Amid G7 Oil Price Cap Talk”, The Japan Today, https://japantoday.com/category/politics/kremlin-slams-japan’s-’unfriendly’-stance-amid-oil-price-cap-talk1, (Date of Accession: 07.07.2022).
[7] Ibid.
[8] “Russia move on Sakhalin-2 thrusts Japan into an energy dilemma”, Asia Nikkei, https://asia.nikkei.com/Business/Energy/Russia-move-on-Sakhalin-2-thrusts-Japan-into-an-energy-dilemma, (Date of Accession: 07.07.2022).
