Moscow approves Japan stakes in Sakhalin energy project

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Despite Tokyo joining sanctions on Moscow over the war in Ukraine, two Japanese trading houses will retain shares in a Russian energy project as the Asian country seeks to ensure its power supply.

Moscow is handing over control of the Sakhalin-2 oil and gas project to a new Russian company, with international stakeholders forced to ask for permission to keep their stake.

Japan, like other nations that have joined the sanctions, is trying to lessen its reliance on Russian energy supplies but is having difficulty finding alternatives.

This year's summer hot caused a power outage in the resource-poor country, which is bracing for a possibly harsh winter.

Mitsubishi Corp stated Thursday that its 10% stake in the Sakhalin-2 project had been approved by Moscow, a day after Mitsui announced that its 12.5% stake had also been approved. The Japanese government backed both firms continuing in the project.

Russia contributes to over 9% of Japan's liquified natural gas (LNG) needs, almost entirely from Sakhalin-2. "This decision is extremely significant for our nation's stable energy supply," government Spokesperson Hirokazu Matsuno said at a regular briefing on Thursday. 

Read next: Japan wants to preserve its participation in Sakhalin-2: Minister

"We will continue to monitor the situation to ensure stable LNG supplies, together with the public and private sectors."

Japan is heavily reliant on imported fossil fuels, in part because several of its nuclear reactors have been shut down since the Fukushima nuclear accident in 2011.

The country previously ruled out withdrawal from the Sakhalin-2 project, despite joining Western-led energy sanctions on Russia. 

Prime Minister Fumio Kishida called last week for a push to revive the country's nuclear power industry in a bid to tackle soaring imported energy costs linked to the war. 

Prior to the Fukushima meltdown, around a third of Japan's power generation was generated from nuclear sources, but in 2020 the figure was less than five percent.  "LNG accounts for over one-third of electricity generation in Japan, while the recent closure of aging thermal power plants has further constrained policymakers' options," wrote James Brady, vice president of Teneo consultancy, in a note.

"The Sakhalin decisions reflect the pragmatic realities of keeping the country's heat and lights on during the most challenging international energy market environment for decades."

What does the new decree constitute?

Upon Russian President Vladimir Putin ratifying the new decree in the economic-trade relations between Russia and foreign nations, any transactions with shares of foreign persons from countries Russia deems unfriendly in its strategic projects and companies in the fuel, energy, and mining sectors, as well as some banks, are banned.

The Sakhalin-1 project was no exception, as the decree bans investors from unfriendly countries from making transactions with shares in it, alongside the Kharyaga oil field until the end of this year.

At a press conference, Economy Minister Hagiuda stated that Japan is aware of the decree and of the fact that it would be impossible to maintain shares and assets in Sakhalin-1 by the end of the year due to the conditions of the new rule. 

“We are currently clarifying the details, so I would like to refrain from commenting. However, for our country, which is 90% dependent on Middle Eastern oil, Sakhalin-1 is an important source of supplies outside the Middle East. There are no changes in our position on maintaining the shares of our companies," Hagiuda further added. 

The Sakhalin-2 project in the works 

Having recently changed its operator with Russia's Gazprom as its majority shareholder, the Sakhalin-2 project is currently exploring two reserves in Russia, northeast of the Sakhalin shelf in the Okhotsk Sea.

The infrastructure circumference entails three offshore platforms, an integrated onshore processing facility, an oil shipping terminal, and a liquefied natural gas (LNG) plant with a capacity of 9.6 million tonnes annually. Sakhalin-2 accounts for about 9% of Japan's LNG imports.