Pressure is mounting for Japanese companies to review their energy business connections with Russia in the wake of Shell's withdrawal from the Sakhalin 2 project, which accounts for close to 9% of Japan's LNG imports, industry sources said March 1.
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Shell's Feb. 28 announcement that it was withdrawing from its partnerships with Russian energy giant Gazprom, including the Sakhalin 2 crude oil and LNG project in the Russian Far East, in response to Russia's invasion of Ukraine was a "shock" for Japanese companies engaged in Russia's energy sector, industry sources said.
A Mitsui spokesperson said March 1 that the company would consider its response regarding the Sakhalin 2 project together with the Japanese government and other stakeholders, after scrutinizing the Shell announcement.
More than half of the 9.6 million mt/year LNG production capacity at the Sakhalin 2 project is committed by Japanese offtakers, and Sakhalin 2 LNG accounts for almost all of Japan's LNG imports from Russia.
Russia accounted for 9% of Japan's total LNG imports of 74.32 million mt in 2021 and 4% of total crude imports of 2.48 million b/d, according to Ministry of Finance data.
Shell holds a 27.5% stake in Sakhalin 2, which was Russia's first LNG facility and featured Russia's first offshore crude platform. Japan's Mitsui (12.5%) and Mitsubishi (10%) also hold stakes via the Sakhalin Energy joint venture.
The Shell development is a blow for Japanese companies, which are becoming increasingly cautious and reviewing their business connections with Russia in the face of tightening international financial sanctions on the country following its invasion of Ukraine.
For Japan, any corporate decision on pulling out from Russian oil and LNG projects would raise questions around energy security for the country, not least consideration of who the Japanese companies' stakes would be taken over by.
Sakhalin 1, Arctic LNG 2
The Japanese energy industry is now closely watching whether ExxonMobil will pull out of the Sakhalin 1 project, where it is operator with a 30% stake, and in which Japan's Sakhalin Oil and Gas Development Co. has a 30% stake, industry sources said.
A SODECO spokesperson declined to comment March 1 when asked about its future involvement in the Sakhalin 1 project. Japan's Ministry of Economy, Trade and Industry has a 50% stake in SODECO, while Japan Petroleum Exploration holds 15.285%, Itochu 14.456%, Marubeni 12.349%, INPEX 6.08% and Itochu Oil Exploration 1.83%.
ExxonMobil has in recent years been reducing its involvement in Russia. In 2018, the US major said it was withdrawing from joint ventures set up with Rosneft in 2013 and 2014 following the introduction of US and EU sanctions against Russia over its role in the conflict in Ukraine in 2014, and the further expansion and codification of US sanctions in 2017.
A Japanese industry source familiar with Russia's oil and LNG projects said Japanese stakeholders' participation in Russian projects would come under greater pressure if ExxonMobil were to follow Shell's Sakhalin move, and noted an increasingly difficult business environment in Russia due to economic and financial sanctions.
Meanwhile, METI minister Koichi Hagiuda said March 1 that Japan will take appropriate actions with regards to Japan Oil, Gas and Metals National Corporation and Nippon Export and Investment Insurance's energy businesses in Russia based on discussions at the G7, among others.
"We intend to cooperate with the G7 and the international community with a view on energy security for stepping up sanctions against Russia," Hagiuda told a press conference. "Regarding Jogmec and NEXI's energy related businesses in Russia, we intend to appropriately respond based on discussions at the G7 among others."
Jogmec provides an equity financing and loan guarantee to Japan Arctic LNG, a subsidiary of Mitsui, which has a 10% stake in the Arctic LNG 2 project. NEXI provides export credit insurance and export credit guarantee for Japanese companies' energy businesses including LNG in Russia.
Initial efforts to disconnect Russia from the global economy and financial system included sanctions on Russian entities but had provisions to exempt energy trade due to the dependence on Russian oil, gas and coal.
There were expectations that energy trade would be ringfenced, but with the cancellation of Nord Stream 2 and Western oil majors exiting Russian energy investments, the impact on energy has reached unprecedented levels, and market participants are bracing for the worst before the situation normalizes.
"The lesson learned is that the sanctions landscape is moving more quickly than anticipated. Only five days ago commentators were talking about 'pea shooters' and the idea of targeting SWIFT was a long way off," Patrick Murphy, Partner, Clyde & Co, said in response to queries about the widening scope of sanctions.
"But there's been a dramatic stiffening of resolve by the Europeans in particular. It may well be that energy remains an untouchable area of the Russian economy, but it would be dangerous to make too many assumptions in the current climate," Murphy said.
"The sensible legal advice would be understand the implications of any change in the sanctions regime in advance and to plan accordingly, including with contractual risk mitigation measures where possible," he added.