25.10.2019 Author: Dmitry Bokarev

Opportunities for LNG Trade between Japan and Russia

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Liquefied natural gas (LNG) is currently the most promising type of hydrocarbon product on the market. It became popular as a cleaner alternative to traditional hydrocarbon fuels, as burning natural gas releases less pollution into the atmosphere, and it can be easily transported to any corner of the world in liquefied form, without having to lay a pipeline.

Russia only recently,  in 2009, became a global LNG supplier. The country already ranks sixth in the world in terms of its LNG production. However, Russia has the potential to achieve far more, with its huge oil and gas resources, its advanced level of technology and close geographic proximity to the world’s top LNG consumers — Japan, China and South Korea.

Japan is the world’s largest consumer of LNG. This is a wealthy country that needs a large amount of energy to keep going, a country that cares about the environment, and Japan’s location as an island country makes it difficult to supply the Japanese with energy via pipeline. In the past, Japan was one of the largest nuclear electricity producers, but after a magnitude 9.0 earthquake in 2011 provoked the disastrous meltdown at the Fukushima 1 nuclear power plant, the Land of the Rising Sun set about closing down a massive number of its nuclear power plants and significantly increased its LNG imports.

Russia is the most convenient LNG supplier for Japan. Russia’s first LNG plant, which began operating in 2009, is located on Sakhalin Island (Russia), where there is a vast amount of oil and gas deposits on the Sakhalin Island Shelf. Sakhalin Island is just 43 km away from Japan. Japanese companies have played a significant role in the construction of this plant, and have also contributed a great deal to the Sakhalin-2 project, which is developing the Sakhalin deposits and producing LNG.

The shareholders of Sakhalin Energy, the consortium developing the Sakhalin-2 project, include two Japanese companies (the Russian company Gazprom is the largest shareholder): Mitsui Sakhalin Holdings B.V. (subsidiary of Mitsui) owns 25%, and Mitsubishi owns 20%.

Before the Sakhalin plant had even begun operating, the Japanese side was quick enough to invest more than $3 billion in the Russian LNG project, which included commissioning several tankers for LNG transportation, built by Mitsui. The investment has paid off: the production capacity of the plant is 9.6 million tons of LNG per year, and the Japanese received about 8 million tons of that in the first years of the plant’s operation.

Japan and Russia have continued to cooperate in the decade that followed. In 2018, Russia became Japan’s fourth largest LNG supplier after Australia, Malaysia and Qatar, supplying Japan with more than 6.6 thousand tons of natural gas worth over $ 3.3 billion.

The results for 2019 are still unknown, but in June 2019, Japan received its first LNG delivery from a new Russian plant, Yamal LNG on the Yamal Peninsula (Russia), which began commercial operation in 2017. The Yamal Peninsula is much further from Japan than Sakhalin, so one can assume that the beginning of LNG transportation from Yamal to Japan marks a significant increase in trade between Japan and Russia, which the Sakhalin plant is not big enough to fully cater for. The LNG is shipped on tankers via the Northern Sea Route (NSR).

A quick reminder — the NSR is a shipping route that runs along the northern coast of Eurasia, connecting the Atlantic Ocean with the Pacific Ocean. It is the most convenient route for transporting and exporting products from Russia’s Arctic deposits.

On September 26, 2019, the annual LNG Producer-Consumer Conference was held in Tokyo. A statement was made at the conference that the popularity of LNG is continuing to increase, and that the global LNG market is growing rapidly. On the day when Japanese investments in LNG-related projects worldwide reached the $10 billion mark, Russian company NOVATEK (the largest stakeholder in Yamal LNG) and Japan’s Mitsui O. S. K. Lines, Ltd. (part of Mitsui, which was mentioned earlier) signed a cooperation agreement, confirming their intention to work together to build marine LNG transshipment complexes in the Kamchatka and Murmansk regions of Russia – that is, on the Eastern and Western ends of the NSR. The thing is that transporting LNG from Yamal is challenging due to its location above the Arctic Circle, so ordinary tankers are not suitable. Special icebreaker LNG carriers are needed for transportation, which are capable of breaking through the polar ice. The operation and maintenance of these ships is quite expensive, so ideally the LNG should be transferred to conventional tankers once the ships have got past the zone with treacherous icy waters. The construction of transshipment points for transferring LNG will make the delivery of Yamal LNG to Europe and the Asia-Pacific region far easier, including LNG delivery to Japan, and will contribute to the development of the NSR.

Russian Energy Week International Forum 2019 was held in Moscow on October 2-5. Russian President Vladimir Putin addressed those in attendance at the event. One of the things he said was that Russia has taken stock of the growing global demand for LNG, which is why the country is developing its resource base in the Arctic. Putin also said that Russia now occupies about 9% of the global LNG market, and its share is constantly growing. The Russian President believes that the LNG sector will occupy about 50% of world gas trade in 10 years from now. Russia has taken this into consideration, and is working on developing its Arctic energy resources, developing the Northern Sea Route, as well as modernizing its cargo fleet and looking at the possible supply routes for its energy exports.

Putin also said that Russia’s share in the global LNG market has more than doubled thanks to the Yamal LNG project, as well as work on the Arctic LNG 2 project, which Russia is working on together with Japan, as well as with France and China. According to the Russian President, the Arctic LNG 2 project will generate another 20 million tons of LNG per annum. Russia aims to produce up to 140 million tons of LNG per annum by 2035.

In his closing statement, Vladimir Putin said that due to the low cost of natural gas production and its convenient logistics, Russian LNG projects are among the most competitive in the world, so Russia expects to see the long-term growth of its share in the LNG market. The market itself is growing, along with the number of countries consuming this product.

LNG is the most forward-looking and promising sector of the global oil and gas market, and Russia is in with a good chance of becoming one of the LNG market leaders. Partnership with Japan should play an important role in making this happen.

Dmitry Bokarev, political observer, exclusively for the online magazine “New Eastern Outlook.”


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