Japan's purchases of Russian oil exceed G7 price cap

Japan's purchases of Russian oil exceed G7 price cap
The ceremony marking the opening of a liquefied natural gas production plant built as part of the Sakhalin-2 project, in easier times before the Russian invasion of Ukraine threatened such collaboration. / Presidential Press and Information Office
By NewsBase News Desk April 4, 2023

Japan has been purchasing Russian crude oil at a price that exceeds the $60 per barrel price cap set by the G7 nations and Australia earlier this year, according to a recent report in the Wall Street Journal. Tokyo made it clear to its Western allies in late 2022 when sanctions against Russia for its invasion of Ukraine were falling into place that Japan would need to continue importing Russian oil and LNG to protect its interests in the Sakhalin oil and gas projects, although Tokyo agreed to adhere to the price cap and apply sanctions.

Last November, the Japanese government announced that oil from Russia’s Sakhalin-2 project destined for Japan will be excluded from the price cap, following approval of the exception by the US Treasury Department. At the time the price cap had yet to be established. However, it is reported that throughput 2022, Japan kept in line with the G7 ban on Russia crude imports.

The price cap was set in order to reduce the amount of revenue Russia could acquire through regular oil sales and use to finance the Ukraine war. It allows non-G7 countries to continue to import Russian crude but not above a total price of $60/bbl. And it restricts those countries from using shipping, insurance and re-insurance companies affiliated with the US or other Western companies in the transport of Russian oil if they pay more than the cap.

Japanese companies continue to hold shares in the Sakhalin oil and gas projects for the sake of post-war energy supplies. Japan has no hydrocarbon resources of its own, and imports almost all of its energy. During 2022, Japan is reported to have restricted the import in Russian crude to an average of 35,000 barrels per day (bpd).

According to official trade data published in international media, Japan purchased during January and February this year some 748,000 barrels of Russia oil, worth about JPY6.9bn, or $52mn, the equivalent of a little less than $70/bbl.

Earlier this year, Shunichi Kito, president of the Petroleum Association of Japan and CEO of the refining giant Idemitsu Kosan, said that Japan would import oil from Sakhalin, if necessary, in order to ensure the supply of LNG. While it is not clear if this is the situation, it is possible, and Japan has warned previously that this scenario could arise.

Last autumn, when Tokyo acknowledged that Japanese energy giants Mitsui & Co. and Mitsubishi Corp. would keep their 22.5% stake in the Sakhalin 2 project after the company was restructured by Moscow, The Japanese Ministry of Economy, Trade and Industry (METI) said that oil produced at Sakhalin-2 would need to be exported for the sake of maintaining stable operations.

Should oil production at the Sakhalin-2 project reach a point where storage tanks are full, bringing oil and gas production to a halt, it would stop LNG production and end LNG shipments to Japan. In that case, Japan would purchase Sakhalin crude in order to keep the LNG trains working, ensuring continued gas supply.

Kito said at the time that there were no formal requests with his firm for crude oil from Sakhalin, but that his company would likely take action “in the event of facing needs to ensure stable LNG supply”, adding that Russian crude would be considered an exception because of the price cap.

According to METI, Sakhalin-2 LNG covers around 9% of Japan’s total LNG imports and accounts for 3% of the country’s power production. The Russian facility produces some 9.6mn tonnes per year (tpy), about half of which goes to Japan, the equivalent of some 9% of Japan’s LNG imports.

Prior to the Ukraine war, Japan, as well as South Korea, was a regular customer for Sakhalin Blend crude.

Japanese investors, including Itochu and Marubeni, are partnered in the Sakhalin Oil and Gas Development consortium, which holds shares in the Sakhalin-1 project with a 30% stake. Japan views Sakhalin-1 as a valuable non-Middle East source of oil. As Russian crude imports declined during 2022, Japanese importers turned to the Middle East, from where at least 90% of the country’s crude imports usually originate. In 2022, that percentage increased.

Meanwhile, on 1 April Japan announced that it would not restore Russia’s ‘most favoured nation’ status as a trading partner for another year. Tokyo withdrew the designation last year following the start of the Ukraine war. The status gives Russia benefits such as low tariffs and few trade barriers, but it has now been extended until April 2024. However, LNG and oil are not affected because there are no tariffs on them.

Japan’s relations with Russia have been tricky since the end of World War II. Tokyo has on numerous occasions attempted to secure the return of a string of northern islands seized by the Soviet Union in 1945. And while Japan supports global efforts to confront Russia over the Ukraine war, it has not provided Kyiv with weapons like the other G7 countries, but only humanitarian aid. Japan has a long-standing policy of not exporting weapons.

Prime Minister Fumio Kishida made his first visit to Kyiv in February to express Japan’s support, the last of the G7 leaders to do so. But he has stated that his hometown of Hiroshima will demonstrate its solidarity with Ukraine when the G7 meets there in May.