Japanese energy companies importing LNG from Russia are facing pressure to recalibrate their procurement strategies, as the international community takes a tougher stance against Moscow.
The companies obtain liquefied natural gas from the Sakhalin-2 oil and gas project on Sakhalin Island in the Russian Far East. Russian state energy group Gazprom owns 77.5% of the project, while Japanese trading companies Mitsui & Co. and Mitsubishi Corporation own 77.5% of the project. They have stakes of 12.5% and 10% respectively.
Eight Japanese electricity and gas companies, including Jira and Tokyo Gas, are purchasing LNG from Sakhalin-2. No Japanese company is using LNG from Russia’s Arctic LNG 2 project, a project financed by Mitsui and other investors.
The European Union agreed on Wednesday to permanently halt imports of Russian liquefied natural gas by November 2027.
In September, US President Donald Trump called on Europe to stop buying any Russian energy, including gas. The US Treasury granted Japanese companies an extension of the exemption, allowing them to import from the Sakhalin-2 field until December 19.
When Trump met with Japanese Prime Minister Sanae Takaishi in late October, he asked Japan to halt imports of Russian liquefied natural gas. Takaishi responded that halting imports would be difficult from an energy security perspective, but it was unclear how the issue would develop.
The eight Japanese energy companies have long-term contracts to supply LNG from Sakhalin-2, accounting for 9% of Japan’s total LNG imports in fiscal 2024.
On Thursday, after the EU news broke, an executive at a Japanese company buying Russian LNG pointed out a contradiction: “The prime minister has emphasized Japan’s dependence on Russian gas, but the purchasing environment has become increasingly difficult.”
In September, a Jira executive in charge of procurement said: “We must maintain supplies as much as possible for the sake of Japanese national security.”
“Prices are stable and production is going well, so there are benefits to buying LNG,” a representative of Fukuoka-based Cybo Gas said.
It takes two to three days to transport LNG from the Russian Far East to Japan, compared with about a week from Australia and up to 40 days from the US Gulf Coast.
The proximity to Sakhalin-2 makes it easier for companies to adapt to demand.
The Sakhalin-2 contracts are about to expire, which means a decision on renewing the agreements is approaching.
One of JERA’s contracts, which imports 500,000 metric tons of LNG annually, will be the first to expire at the end of 2026. JERA’s decision is likely to affect the other seven importers.
The loss of Russian LNG imports is likely to increase electricity and gas prices in some areas of Japan. The average price of Russian liquefied natural gas is cheaper than alternatives produced in Australia and Indonesia, according to a report by the Japan Mineral and Energy Security Organization (GOGMEK).
Kyushu Electric Power and Hiroshima Gas both rely heavily on the Sakhalin-2 field. Both companies’ price lists are structured so that part of the increase in fuel costs is passed on to consumers. If the cost of importing LNG rises due to changing suppliers, families and companies will face more financial burdens.
Japanese importers have been working to mitigate their exposure to LNG supply risks since the Russian invasion of Ukraine in 2022.
Hiroshima Gas Company buys 350,000 tons of liquefied natural gas annually. Nearly 200 thousand tons come from Sakhalin-2. The company now has contracts with 10 companies to supply LNG in emergencies, more than three times the three companies it had contracts with previously.
All of Hiroshima Gas’ LNG contracts expire in fiscal 2030. As renewal negotiations begin, the company “must also take into account geopolitical risks,” President Tomohiko Nakagawa told reporters in April.
Global demand for liquefied natural gas is expected to rise by 80% by 2040, according to estimates by European research firm Rystad Energy. Demand is expected to exceed capacity in 2037, due to population growth in emerging economies and the expansion of the digital sector in developed countries.
Japan depends on Australia and Southeast Asia for most of its supplies of liquefied natural gas. However, the gas fields in these areas are running out, leaving little room to increase production.