01/07/2022 12:10 Japanese energy firms cling on to their Russian assets | The Economist 01/07/2022 12:10

j Japanese energy
y firms cling on to their Russian assets
y | The Economist
and, ever since Russia invaded Ukraine in February, a sore point in relations
Menu FO between Japan and its Western allies.

Listen to this story. Enjoy more audio and podcasts on iOS or Android.
Business | The Sakhalin exception

Japanese energy firms cling on to their Russian 0:00 / 0:00

assets
The two projects, Sakhalin-I and Sakhalin-II, lured energy firms from America,
That puts them in line with Japan’s government but at odds with the West
Britain and India, as well as Japan and Russia. Shortly after Vladimir Putin’s tanks
rolled into Ukraine, however, ExxonMobil, an American giant, pledged to divest
its 30% stake in Sakhalin-I and Shell, a British rival, said it would offload its 27.5%
stake in Sakhalin-II.

Not the Japanese. Sakhalin Oil and Gas Development Company, a public-private
partnership, will hold on to 30% of the oil-producing Sakhalin-I; two big trading
houses, Mitsui and Mitsubishi, will keep their 12.5% and 10%, respectively, of
Sakhalin-II, which pumps out liquefied natural gas (lng). The government in
Tokyo has no problem with that. In May the economy minister, Hagiuda Koichi,
declared that the Japanese shareholders wouldn’t leave even if asked to by the
Russian government.

Japan’s approach seems out of character. In other instances the country’s position
with respect to Russia has mirrored those of America and Europe. In June the
Japan Bank for International Co-operation, a state-owned lender, extended its

freeze, introduced in March, on project financing of Russian natural-gas projects

Jun 30th 2022 (Updated Jul 1st 2022) | SINGAPORE
in the Arctic. Private-sector financial firms have cut links with their Russian
counterparties. Exports to Russia of high-performance machine tools, quantum
Share Give
computers, 3d printers and other items have been blocked by Japanese sanctions.
Why, then, stay in Sakhalin? For one thing, this avoids the pickle that the projects’
Editor’s note (July 1st 2022): After The Economist went to press Vladimir Putin Western partners now find themselves in. Selling their stakes is easier said than
ordered the nationalisation of the Sakhalin-II natural-gas project “to defend [Russia’s] done. ExxonMobil took a $3.4bn write-down related to the project in the first
national interests”. Japan’s government later said it did not believe this would quarter and Shell took a $1.6bn charge. The war limits the number of potential
jeopardise the supply of gas from Sakhalin. buyers, mostly to state-run firms from countries which are neutral or friendly
towards Russia, such as Sinopec, China’s state energy giant, or ongc Videsh, the

T he island of Sakhalin, pinned between Japan and Russia just north of

Hokkaido and to the west of the Kamchatka Peninsula, has historically been
the site of conflict between the two north Asian neighbours. Today, as the home of
two massive fossil-fuel projects, it symbolises an uneasy Russo-Japanese peace—
https://www.economist.com/business/2022/06/30/japanese-energy-firms-cling-on-to-their-russian-assets
international arm of India’s Oil and Natural Gas Corporation (which already owns
20% of Sakhalin-I). As forced sellers, ExxonMobil and Shell have a weak
negotiating hand, which the Chinese and the Indians would be only too happy to
1/6
exploit
https://www.economist.com/business/2022/06/30/japanese-energy-firms-cling-on-to-their-russian-assets 2/6
01/07/2022 12:10 Japanese energy firms cling on to their Russian assets | The Economist
exploit.

Japan’s government dislikes the prospect of disposing of the Japanese assets in

such a fire sale. It is particularly loth to hand one of the world’s largest and most
advanced gas projects over to a Chinese competitor for a song. And unlike
ExxonMobil’s and Shell’s investments, which followed a purely commercial logic
that Western sanctions and the reputational risk of remaining in Russia have
severely undercut, it worries about energy security.

Archipelagic Japan has no pipelines or electricity grids linking it to other

countries. It is the world’s second-biggest importer of lng. Around 9% of its
supply comes from Russia, and the bulk of that is produced in Sakhalin. This year
between 50% and 69% of Sakhalin-II’s monthly gas output has headed for Japan,
according to Kpler, a data firm. “When the cold light of day sets in you have to
think about what impact you are having on Russia versus what impact you are
having on yourself,” sums up Yuriy Humber of Japan nrg, an energy-research
firm in Tokyo.

Similar considerations are being aired in Germany, which gets more than half its
gas from Russia. But the German government does want to reduce its reliance on
Russian oil and gas, the sale of which is bankrolling the campaign against
Ukraine. Japan’s prime minister, Kishida Fumio, has talked faintly about joining a
Western embargo on Russian oil and has been silent on Russian gas. To Western
ears, that silence sounds increasingly deafening. 7

Read more of our recent coverage of the Ukraine crisis. For more expert analysis of the
biggest stories in economics, business and markets, sign up to Money Talks, our weekly
newsletter.

This article appeared in the Business section of the print edition under the headline "The Sakhalin exception"

Business
July 1st 2022

→ Beach reads for business folk

→ Mars Inc gets the purpose v profit balance right

→ Japanese energy firms cling on to their Russian assets

→ The pandemic is boosting sellers of traditional medicine

https://www.economist.com/business/2022/06/30/japanese-energy-firms-cling-on-to-their-russian-assets 3/6