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Japan eyes short-term measures for Sakhalin 2 LNG supply contingency: minister

Highlights

Demand restrictions among possible measures

Maintaining stakes in Sakhalin 1, 2 projects

More nuclear plant restarts needed beyond next summer

Japan could take such steps as exchanging LNG cargoes between companies and procuring spot LNG cargoes in the short term should its supply from the Sakhalin 2 project in Russia's far east be disrupted, newly appointed Minister for Economy, Trade and Industry Yasutoshi Nishimura said Aug. 12.

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"In the short term, we expect exchange [of LNG cargoes] between companies as necessary," Nishimura said in a group interview, responding to a question about Japan's response in the event of Sakhalin 2 LNG supply disruption.

"We intend to make absolutely sure about stable energy supply by undertaking various steps including alternative procurements from the spot market as well as restricting demand as needed to some extent," he said, adding that Japan will also seek to secure supply sources from outside of Russia in the medium to long term to ensure stable energy volumes.

Nishimura was appointed as the METI minister in a cabinet reshuffle Aug. 10 amid amid heightened concerns in Japan over potential LNG supply disruptions after Russia issued June 30 a decree to transfer all rights and obligations held by Sakhalin Energy, operator of the Sakhalin 2 oil, gas and LNG project, to a new Russian entity.

The new operator, Sakhalinskaya Energija, registered with the English name Sakhalin Energy Limited Liability, was added to Russia's national company register Aug. 5 after the Russian government issued an order Aug. 2 to set up the new operator in Yuzhno-Sakhalinsk within three days.

More than half of the 9.6 million mt/year LNG production capacity at Sakhalin 2, in which Mitsui has a 12.5% stake and Mitsubishi a 10% interest, is committed to Japanese offtakers. Mitsui and Mitsubishi need to decide whether to participate in the new Russian entity by Sept. 4 under Russia's imposed deadline.

Nishimura said that, by closely communicating with the companies, "we intend to consider specific measures after carefully verifying the Russian government's decision."

Russian exposure

Nishimura added that Japan intends to maintain its stake in Sakhalin 2 and Sakhalin 1, describing the projects as "significantly important supply sources."

Russia accounted for 9% of Japan's total LNG imports of 74.32 million mt in 2021, its fifth-largest supplier, as well as supplying 4% of Japan's total crude imports of 2.48 million b/d, while the Middle East contributed 92% of inflows, according to data from Japan's Ministry of Finance.

Russian President Vladimir Putin on Aug. 5 signed and published a decree that prohibits until Dec. 31 transactions involving companies from "unfriendly" countries that would impact the shareholder structure of production-sharing agreements, joint ventures and other investment agreements.

This includes foreign stakes in the PSAs for the Sakhalin 1 oil and gas project and the Kharyaga oil field. Japan's Sakhalin Oil and Gas Development Co., or SODECO, has a 30% stake in the Sakhalin 1 project. METI has a 50% stake in SODECO, while Japan Petroleum Exploration holds a 15.285% interest, Itochu 14.456%, Marubeni 12.349%, INPEX 6.08% and Itochu Oil Exploration 1.83%.

Pressing issues

Aside from the Sakhalin 2 concerns, Japan is currently in the midst of riding out the summer power demand season, with a series of heat waves tightening the supply and demand balance. In addition, there is a projected severe imbalance in the power supply and demand situation in the country's winter outlook.

"Certainly stable energy supply is one of the most important issues at the present moment," Nishimura said.

While it has a cautiously optimistic outlook for stable electricity supply this summer, METI intends to undertake comprehensive measures both on the supply and demand sides for the winter, Nishimura said.

On the supply side, METI intends to undertake measures including the restart of nuclear power plants upon confirming safety, as well as advancing restoration of some thermal power plants and urging the restart of mothballed thermal power plants for the winter, Nishimura said.

"First of all, securing safety as the fundamental premise, we intend to work with companies to secure restarts of up to nine nuclear reactors by speeding up construction works for safety measures, or adjusting maintenance schedules among other steps," Nishimura said.

Japanese Prime Minister Fumio Kishida said July 14 that he wanted up to nine nuclear reactors to be operational by this winter and to secure capacity from 10 additional thermal power plants to ensure sufficient generating capacity, given the severe supply and demand outlook.

"In order to secure stable electricity supply beyond next summer, we recognize importance of further restarts of nuclear power plants," Nishimura added.