High Asset

Japan Holds Onto Russian Energy Assets Even After Big Oil Exits

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(Bloomberg) — Japan plans to hold onto its investments in major Russian energy projects for now, according to people with knowledge of the matter, despite ongoing aggression in Ukraine and a high-profile exit by Big Oil.

Unless the situation with Russia drastically changes, Japanese companies and consortia have decided keep their stakes in Sakhalin-1, Sakhalin-2 and Arctic LNG 2 projects, according to people at the firms and government officials. Russian oil and liquefied natural gas export projects are geographically closest to Japan and are strategically important for the resource-poor Asian nation, said the people, who requested anonymity to discuss private details.

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BP Plc, Shell Plc and Exxon Mobil Corp. shocked the energy industry when they walked away from Russian assets worth billions of dollars after Moscow’s invasion of Ukraine. In contrast, Japan has dragged its feet on a decision because it can’t easily replace fuel from its Russian oil and gas assets while it is also doesn’t want to upset allies that are ratcheting up pressure to end the war.

“The Japanese partners do not necessarily have the same reason to act as their other partners” from the U.S. and Europe, said Hiroshi Hashimoto, an analyst at the Institute of Energy Economics, Japan. “They have different considerations,” including stability of supply.

Japan’s stance illustrates how Asian nations are having difficulty divesting from Russia, highlighting Moscow’s success at positioning itself as a major supplier of raw materials to the region. For Japan, owning upstream energy assets is far more important than just having a supply contract — it gives them a seat at the table and helps to ensure that the fuel will actually be delivered.

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Trade Minister Koichi Hagiuda said on Tuesday that Japan must protect its energy security “as much as possible” as it responds to Russia. The sanctions will be pointless if Japan exits the projects only for another country to take its place, Hagiuda said on Monday.

Resource-poor Japan imports about 9% of its gas from Russia, with an initial supply deal to develop oil and natural gas on nearby Sakhalin island dating back to 1972. Though it took decades for the LNG export plant in Sakhalin to start up, it has quickly become one of the most reliable projects for Japan. In total, Japan has about $8.4 billion worth of investments in Russian energy facilities, according to Wood Mackenzie Lens.

More Complicated

Still, Japan’s investments in Russia could become more complicated as Prime Minister Fumio Kishida takes a stronger stance against Moscow, with local newspaper Yomiuri reporting that Tokyo is set to name Russia a “security challenge.” Japan has joined with the U.S. and European countries in placing sanctions on Russia, including freezing the assets of Russian oligarchs and supporting an EU initiative to exclude Russian banks from the SWIFT payment system.

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Mitsubishi Corp., Mitsui & Co., Itochu Corp., Japan Petroleum Exploration Corp., and Tokyo-based Sakhalin Oil and Gas Development Co. said they are gathering information and considering how to proceed with stakeholders about the future of their Russian investments.

Trading houses like Mitsubishi and Mitsui have spent decades building relationships in Russia, including the Sakhalin-2 LNG export project, which first began operations in 2009. A consortium including state-backed Japan Oil, Gas and Metals National Corp. and Mitsui has also taken a stake in another Russian energy project, the Arctic LNG 2 project, which is scheduled to start output in 2023.

Japanese firms were surprised by Shell’s move to exit the Sakhalin-2 project last week, according to people with knowledge of the matter. The withdrawal prompted Mitsubishi and Mitsui to hold urgent discussions with Japan’s government, the people said. Meanwhile, Exxon’s decision to dump its stake in the Sakhalin-1 offshore oil asset upset Japanese partners as the U.S. giant operates the facility and without its knowhow, the future of the plant is in jeopardy, another person said.

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Within Japan, its investments in the Russian projects are seen as being held for national energy security supply reasons, and not solely for profits. Japanese partners with government financial support are invested to secure a stable supply of energy.

Still, Japan is cognizant that it must balance its energy security needs against its relationships with its European and American allies. Policymakers in Tokyo and Japanese corporations are likely to come under increasing pressure to distance themselves from Russia and secure alternate suppliers, said Susan L. Sakmar, a visiting assistant professor at the University of Houston Law Center.

Most Japanese LNG importers have paused spot purchases from Russia, and companies aren’t keen to make any new investments in the country as long as the war in Ukraine continues, the people said, requesting anonymity to discuss private details.

“While this will be a difficult choice given Japan’s energy security concerns, Japan is a close ally of the U.S., which has already signaled it is willing to secure more LNG supply for its allies,” Sakmar said. 

©2022 Bloomberg L.P.

Bloomberg.com

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