Japan to phase out Russian oil use but remain in Sakhalin energy projects

In a major shift, Japan announced Monday it will join other Group of Seven member nations in phasing out Russian oil imports, but will remain involved with two Russian oil and liquefied natural gas (LNG) projects in Sakhalin.

“We will take steps to phase out (Russian oil imports) in a manner that minimizes adverse effects on people’s lives and business activities. But we plan to keep our interests (in the two Sakhalin LNG projects) unchanged,” Prime Minister Fumio Kishida told reporters following a virtual meeting of G7 leaders.

In accordance with the G7, Japan will ban Russian oil imports “in principle” as part of additional sanctions levied on Moscow to punish it for its invasion of Ukraine in February. Tokyo had earlier appeared reluctant to commit to such a step, due to concerns about possible retaliation by Russia against its Sakhalin investments and a policy of diversifying energy sources.

The impact of the ban, which is expected to come in stages, may have limited effect on Japan’s oil supplies. Japan imported only 3.6% of its crude oil from Russia in 2021, compared with 10.8% of its coal and 8.8% of its natural gas.

Japan’s decision to remain in the Sakhalin-1 and Sakhalin-2 projects despite the pullout of other major partners reflects their importance to resource-poor Japan, Chief Cabinet Secretary Hirokazu Matsuno said Monday. Japan imports 99% of its oil and LNG.

Its crude oil imports were 2.49 million barrels a day in 2021 — a 0.5% increase from the previous year and the first increase in nine years.

But LNG is also critical, providing 36% of the country’s electricity in 2021. Main LNG sources include Australia, which accounts for 36% of imports; Malaysia, at 14%; and Qatar, with 12%. Last year, the U.S. and Russia each supplied roughly the same amount: about 9%.

Sakhalin-1 is located off the eastern shore of the northern end of Sakhalin Island. There are estimated reserves of 2.3 billion barrels of oil and 17.1 trillion cubic feet of natural gas, and the project’s development partners include Exxon Neftegas, a subsidiary of ExxonMobil, as well as Sakhalin Oil and Gas Development Company (SODECO), which holds a 30% share. Indian and Russian firms also have investments in the project.

SODECO, a Japanese consortium, includes the economy ministry, Japan Petroleum Exploration Co., Itochu Corp. and Marubeni Corp.

But following ExxonMobil’s announcement in March that it would discontinue operations at Sakhalin-1 and make no new investments in Russia, questions arose about whether Japanese firms would follow suit.

Marubeni announced last week it had cut its Russian investments by ¥12.6 billion in the fiscal year ending March 31 by writing down its stake in Sakhalin-1. The firm, which still has a 12.3% stake in SODECO, said it would officially remain in the project as part of Japanese government policy, although it hoped to withdraw amid the war in Ukraine, Marubeni CEO Masumi Kakinoki said.

The Sakhalin-2 project has four investors, including Russian government-owned energy firm Gazprom, as well as Shell PLC, Mitsui & Co. and Mitsubishi Corp. Oil production capacity is 150,000 barrels a day, while annual LNG production capacity is 9.6 million tons, about 60% of which goes to Japan. Mitsubishi and Mitsui have said they will remain with the project. Shell, however, has announced its withdrawal.

While Japanese firms, backed by the government, will remain in the Sakhalin projects, Russia experts say Tokyo’s decision to join its G7 counterparts and agree to phase out Russia oil is a major step.

James Brown, a political scientist at Temple University in Tokyo, said the Kishida government had until now been willing to do much with regard to sanctions, but energy had always been a red line.

“Japan was generally considered too vulnerable to shortages. However, the strong line adopted by other G7 countries and continuing Russian atrocities in Ukraine appear to have forced (Japan’s) hand,” Brown said.

Measures that even a few months ago may have seemed unthinkable, now appear to be on the table.

“Both Sakhalin-1 and 2 represent incredibly lucrative contracts for Japanese business,” Brown added. “But if the war in Ukraine continues, we may see a situation where Japanese companies become willing to write off projects such as Sakhalin-1, which, with other businesses pulling out and a lack of tankers to transport the oil, is already rife with problems.”

And while Russian oil represents a relatively small fraction of total imports, the desire to avoid an overdependence on Middle Eastern supplies has made it extremely valuable.

The government has therefore stressed that it needs time as it seeks alternatives to plug the deficit left by the loss of supply from Russia.

“It is impossible to predict how long it might take Japan to phase out Russian oil,” Brown said. “The ban on Russian coal wasn’t immediate either, and it is understandable that such a process will take time.”