Japan needs supply, demand saving measures for Sakhalin 2 LNG contingency: IEEJ

Jul 13, 2022

Japan needs to prepare contingency arrangements, including potential LNG supply and demand restriction measures, in the face of uncertainty surrounding Russia’s recent decree involving the transfer of the operatorship of the Sakhalin 2 LNG project to a Russian entity, senior analysts at the Institute of Energy Economics, Japan said July 12.

The analysts, speaking on an IEEJ webinar, added that such plans are needed because of Japan’s current reliance on around 6 million mt/year of Russian LNG imports, which will not be easy to replace in times of supply disruption from the Sakhalin 2 project as Europe is also stepping up its own LNG procurements for winter.

Russia accounted for 9% of Japan’s total LNG imports of 74.32 million mt in 2021, its fifth-largest supplier, according to data from Japan’s Ministry of Finance.

Over half of the 9.6 million mt/year LNG production capacity at the Sakhalin 2 project, in which Japan’s Mitsui has a 12.5% stake and Mitsubishi 10%, is committed to Japanese offtakers.

“Regardless of whether there is any direct involvement with [Russia’s latest] action, alternative measures should be considered for sure, taking into account that the supply side could potentially be threatened,” according to Hiroshi Hashimoto, IEEJ’s senior analyst and head of gas group.

Russian decree

Russian President Vladimir Putin issued a decree June 30 transferring all rights and obligations held by Sakhalin Energy, the operator of the Sakhalin 2 project, located at Yuzhno-Sakhalinsk, to a new Russian company, citing unspecified “actions by the US and linked foreign countries and organizations that are unfriendly and incompatible with international law.”

The decree stipulates existing stakeholders have a month to submit their approval for the transfer of stakes to the newly created company, after which the government will rule on the admissibility of the submissions.

It was unclear on what grounds the government would or would not allow the existing shareholders to hold proportional stakes in the new company. In the event of refusal or the deadline being missed, the corresponding stakes are to be sold, with the proceeds transferred on behalf of the shareholders to government-designated Russian bank accounts, from which any expenses incurred to date can be deducted.

Hashimoto said it remains unclear as to how much room for negotiation there is in these conditions.

“In any case, we should have a big picture within a month or two,” Hashimoto said.

Alternative supply

For Japan, it is desirable to maintain its equity participation as well as its LNG supply from the Sakhalin 2 project but the country needs to accelerate its consideration of contingency measures in the event it loses its supply, Hashimoto said.

Asked whether Japan would be able to secure alternative supplies to the 6 million mt/year from Sakhalin 2, Hashimoto said: “The procurements will likely need to be piled up from taking various measures.”

Such alternative procurements could be achieved from a combination of requesting an incremental supply from existing long-term suppliers, supply from portfolio suppliers, as well as possibly from Chinese players, which have resold a fairly large volume of their supply in the first half of this year, Hashimoto said.

Looking at the second half of the year alone, Japan’s alternative procurement exposure would be “a couple of million mt,” said Hashimoto, adding that it would still “certainly be a hard” task.

Ken Koyama, IEEJ’s senior managing director and chief economist, also said that Japan will need to consider means other than alternative LNG supply because it will be extremely difficult to to make up all of the loss of about 6 million mt/year of the supply from additional procurements.

Having a rigorous system of energy conservation, or electricity and gas savings would be among possible contingency measures to be triggered when facing fuels supply issues, Koyama said.

Looking at after 2026, additional LNG supply could be expected from projects in the US, Australia, Qatar among others, Hashimoto said.

“In other words, signing long-term contracts, or providing some sort of supports for promoting projects on the production side will be needed,” Hashimoto added.
Source: Platts

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