Why Japan Will Struggle to Do Without Russian Energy

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Japan’s stake in a big Russian energy project known as Sakhalin-2 is in limbo after President Vladimir Putin signed a decree to transfer the rights to a new Russian company. Resource-poor Japan depends on Russia for its natural gas needs, which is why Prime Minister Fumio Kishida has been reluctant to make a complete break with Moscow. While Japan is working frantically to secure alternative supplies, a global energy crunch means that it will be challenging for the island nation to quit Russian fuel.

1. What sanctions has Japan imposed on Russia so far?

Ever since the invasion of Ukraine in late February, Japan has joined the US and European countries in sanctioning Russia. It has imposed export controls, including on semiconductors, and has sanctioned some oligarchs and their family members. Russia is barred from issuing government bonds in the country. Japan is also taking in Ukrainian refugees. After reports of alleged war crimes in Ukraine by Russian forces, Japan said in April it would follow the European Union and Group of Seven countries and ban imports of Russian coal. Kishida said the country will secure alternative sources of energy in a speedy manner, although no time frame was given.

2. What about natural gas?

Japan had drawn a line there, as it has few resources of its own. Japanese trading houses Mitsubishi Corp. and Mitsui & Co. own a combined 22.5% of the Sakhalin-2 project, and a majority of the gas produced there supplies Japan. Kishida has called it “an extremely important project for energy security,” and said the government has no plans to leave the project, as UK oil majors BP Plc and Shell Plc have said they would do. It also has avoided any direct action on Russian liquefied natural gas, which makes up 9% of Japan’s imports.

3. What does Putin’s move mean for that ownership?

In transferring the rights in a June 30 decree, cited threats to national interests and economic security. Stakeholders have one month to say whether they’ll take stakes in the new company, and those who opt out may not be fully compensated, the statement said. The move could force Japan to drop ownership in the Sakhalin-2 plant or disrupt vital LNG deliveries. And Moscow may issue similar orders on other energy assets in Russia with Japanese co-owners, including the Sakhalin-1 oil and Arctic LNG 2 projects.

4. Can other suppliers replace Russian gas?

Not in the short term, as the global natural gas market is grappling with a supply shortage. Demand for LNG is surging as Russia curbs pipeline supply to Europe, while a key US LNG export facility will remain offline for months after a fire in June. Spot LNG prices are trading at a record high for this time of year amid intensifying competition between Europe and Asia for fuel. Plus, Sakhalin-2 is the closest LNG export facility to Japan, so importing supply from new facilities will tie up ships in longer journeys, essentially log-jamming already strained supply chains.

5. What does this mean for Japan?

Japan is struggling with tight electricity supplies due to extreme weather, retirement of older power plants, strong growth in unpredictable renewable projects and delays to restarting nuclear reactors. Any disruption to LNG shipments threatens to stretch their grid further, risking blackouts across parts of the country. And procuring alternative — and expensive — LNG supplies will boost power bills for consumers and businesses, while also adding to inflation woes.

6. What about alternative fuels?

Besides LNG, there aren’t many other choices. Coal markets are tight and spot prices in Asia are trading at a record high. Plus, Japan moved to ban Russian coal shipments, standing with its G-7 partners. This may put pressure on the Japanese government to accelerate the restart of idled nuclear reactors, but that would be challenging without changing post-Fukushima safety rules or gaining more support from local municipalities.

• Why speeding up the process to restart Japan’s idled nuclear power plants will be difficult.

• Japan has been running on a thin margin of power capacity for the past decade.

• Henik Fung and Chia Cheng Chen at Bloomberg Intelligence examines northern Asia’s energy security risks.

• Another QuickTake on why Japan will release water from Fukushima into the sea.

More stories like this are available on bloomberg.com

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