Strengthening energy ties between Russia and Japan via a proposed gas pipeline from Sakhalin to Japan would benefit both economies and contribute to an easing of political tensions over the Kuril Islands.

A Gazprom Geologorazvedka worker on a Doo Sung semi-submersible drilling rig exploring for natural gas in Yuzhno Kirinskoye field in the Sea of Okhotsk off Sakhalin. Photo: TASS

While presenting the details of Japanese Prime Minister Shinzo Abe’s visit to Vladivostok on Sept. 2-3, news reporters began to shed light on the Japanese proposed bid package, allegedly consisting of eight points. The plan comprises of appeals to widen cooperation in the spheres of healthcare, urban planning and small and medium enterprise cooperation.

However, the most noteworthy item in the plan is the reinvigoration of a long-faded proposal to construct a gas pipeline between Russia’s Sakhalin Island and Japan. Additional details on the proposed pipeline are sure to emerge over the course of the following months, all the more so as Abe’s visit will be reciprocated by Russian President Vladimir Putin in December, when he will visit Abe’s hometown, Yamaguchi.

Initial plans for the Sakhalin-Japan pipeline

The idea of constructing an underwater pipeline between Sakhalin and the Japanese islands has been floating around in one form or another for the last 15 years. In 2002, Japan Petroleum Exploration Co. expressed its interest in constructing a Sakhalin-Tokyo gas pipeline, which it deemed technically feasible and economically viable. At that time, sources cited a throughput capacity of 8 billion cubic meters (bcm) per year.

ExxonMobil, the majority owner and operator of the Sakhalin-1 project, reciprocated the interest and reiterated its willingness to start gas exports by 2008. Afterwards, the project was silently and inconspicuously phased out. In 2006, a new variant emerged of a gas pipeline uniting Sakhalin and Japan, to be constructed between Sakhalin’s gas fields and the northern prefecture of Aomori on Hokkaido Island.

The Japanese offer came on the back of rising liquefied natural gas (LNG) prices. Once again, the initiative did not last long as the Russian Federal Service for Oversight of Natural Resource Usage (Rosprirodnadzor) investigations of environmental damage to Sakhalin’s wildlife forced the subject yet again into temporary oblivion.

The Fukushima nuclear disaster in March 2011 brought the issue back into the limelight. Russia, not unlike its firm commitment to stand by the United States immediately after the 9/11 terrorist attack, was one of the first countries to offer support to Japan in the form of rescue teams and energy supplies. This reinvigorated the dialogue between the two countries and provided a new impetus for the discussion of joint energy projects.

Fukushima not only shook the Japanese national psyche, it also made Japan more vulnerable as its energy self-sufficiency rate dropped to a mere 6 percent. Famously devoid of fossil fuel resources, Japan has been trying to get the most out of the current dire situation when almost all of its energy is produced from fossil resources.

Although there exist many other gas-producing regions from which it is possible to source the gas, Sakhalin is a fitting variant. Only 45 kilometers away from the northernmost tip of Hokkaido, Sakhalin’s gas production amounted to 28.4 bcm in 2015. Of this, Russian energy giant Gazprom’s part is approximately 8.5 bcm  – 7.5 bcm from Sakhalin-II and an initial 1 bcm  from Sakhalin-III (Kirinskoye field). As Sakhalin-III moves towards its projected peak production levels of 21-22 bcm, to be reached by 2026-2027, Gazprom would find ample space to fill an eventual gas pipeline to Japan, as well as to continue with its LNG business. Even U.S.-imposed sanctions specifically targeting the gas-rich Yuzhno-Kirinskoye field need not derail the project.

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Japan’s post-Fukushima energy challenges

Strengthening energy ties between Russia and Japan would contribute to an easing of political tensions over the Kuril Islands as both sides would be less inclined to risk a full-blown confrontation. Russo-Japanese energy cooperation should be completely depoliticized, as the fate of the pipeline in no way tilts the balance of power over the Kuril issue to one side or another.

Moreover, Japan’s political elites are unlikely to flirt with the idea as economic matters, primarily kick-starting the stagnant economy with the three-pronged approach advocated by Abe, are seen as a top priority. It has to be said that military-related matters will play an integral role in Abe’s political discourse as he is likely to modify the Japanese constitution in the wake of his recent upper house elections win in July 2016, yet its ramifications will be more pertinent to Korea and China than to Russia.

The sole fact that the gas pipeline project has found government support after many years of linking the development of economic cooperation to signing a Russo-Japanese peace treaty, with the return of the Northern Territories (as the Kuril Islands are called in Japan) as a sine qua non condition, marks a significant shift towards pragmatism on the part of Japanese politicians.

Japan is advocating an undersea gas pipeline for a number of reasons, but primary among them is profit. It has been relying significantly on LNG imports to cover its energy needs. Southwest Asian LNG prices have been higher than European or American ones for quite some time, therefore, a gas pipeline would allow Japan to avoid paying a significant price premium.

Although it has to be said that LNG prices in Southwest Asia will eventually find a suitable balance and will adjust to global prices, especially given that new LNG capacity is on the brink of being brought on-stream in the Pacific, Japan is strategically correct in its quest to find a more economically attractive alternative.

Japan shifted away from nuclear in the immediate aftermath of Fukushima. Inasmuch as nuclear amounted to 27 percent of Japan’s energy production before the catastrophe, Tokyo began the quest to compensate for the unused production capacity. Within a year, almost all of Japan’s nuclear plants were shut down – even today only 3 out of 42 operable reactors are online. Many nuclear reactors could be potentially brought on-stream, however, district courts have blocked the restarts of some plants across Japan against the background of lawsuits filed against generation companies.

Therefore Tokyo had to compensate for the lost production capacity by increasing its imports of gas (the no. 1 source of electricity in Japan), coal and oil. Oddly enough, Japan still burns crude oil for electricity generation – between 2011 and 2012, its intake of oil increased threefold. Although its share has fallen since, it remains an unpleasant nuisance for Tokyo.

Concurrently with a hike in gas-powered energy production, coal has found its way back to Japan’s energy matrix and is bound to bolster its standing. As of 2015, coal-fired thermal power generation costs are 1.4 Yen/KWh lower than those of LNG are, therefore coal might surpass gas and become Japan’s leading power generation source by 2019. Thanks to more efficient, less polluting coal plants Tokyo even intends to meet its emission targets by 2030, implying a 34 percent emission reduction within less than 15 years.

At the same time, Abe has not given up on nuclear energy and is actively promoting a bold vision of bringing back Japanese nuclear production to 20-22 percent of its energy production needs. However, as noted previously, Japanese society has oftentimes found itself at odds with the government’s willingness to relaunch the country’s nuclear potential.

The materialization of the Sakhalin-Japan pipeline would give Russia, or Gazprom to be more precise, additional bargaining leverage with the European Union. It would also help Gazprom with the traditionally staunch Chinese companies as it would rid itself of a one-market export dependence and bring to fruition the eastbound gas supply diversification it long sought to attain. If enough political will would be demonstrated to push the Japanese deal through, it could also give impetus to revive Russo-Korean talks on the construction of a gas pipeline either via North Korea or by means of an underwater pipeline.

Clearing the obstacles

The pipeline’s construction is projected to cost about $6 billion. The financial details of the Sakhalin-Japan pipeline might seem unmanageable for Gazprom alone given the ongoing financial sanctions of the European Union and United States, yet the project’s partners in Japan have repeatedly expressed their readiness to take up a fair share of the investment required.

There are several reasons for Gazprom’s deferral of the Sakhalin-Japan pipeline project.

For instance, the Russian side has been voicing doubts about the seismic safety of such an endeavor. Initially, the pipeline was assumed to be laid on the seabed along the Japanese coast where crust fractures are a commonly occurring phenomenon. The current project draft presupposes a brief underwater section between Sakhalin and Japan’s northernmost tip of Hokkaido, Wakkanai, to be followed by a ground section throughout Hokkaido, another brief underwater section in the Tsuguru Straits and the final ground section on the island of Honshu. This supply route does not eliminate seismic risk altogether but it does lower it by an order of magnitude.

Also read: "Why Russia's best friend in the G7 might turn out to be Japan"

Fisheries were also a matter of concern as lobby groups voiced their concerns that the pipeline might compromise traditional fishing areas, yet this seems to be off the table as the current itinerary intentionally avoids them.

It might happen that the biggest encumbrance to the Sakhalin-Japan pipeline will be another Gazprom-led transportation project that is largely constructed to meet Japan’s gas needs. Vladivostok LNG’s first leg, with a liquefaction capacity of 5 million tons per year (out of a total of 15 million tons per year), should be brought online by 2018.

The project, officially launched in 2011, was closely coordinated with Japan’s Ministry of Economy, Trade and Industry as the Land of the Rising Sun was seen as the base market for Vladivostok’s LNG. Although there are no formal obligations to buy Russian LNG from the Japanese side and Tokyo could easily shift its attention to the currently preferred Sakhalin-Hokkaido-Honshu route, Gazprom would still have to find other market outlets for its LNG. If it does not, its approach to the new supply route might be far from rosy.

The Sakhalin-Japan gas pipeline is without any doubt technically feasible, costly and complex as it is, and its fate will be decided by sheer political will. Sakhalin produces the volume of gas required for this endeavor and Japan’s energy-intensive economy has the capacity to make good use of it.

From Russia’s point of view, LNG would mean flexibility of supplies and pipelines to ensure their stability. Finding the right balance between the two might be the hardest part. Even if it means involving the Japanese side in the gas pipeline and the Vladivostok LNG deals suffers a setback, it is not worth the trouble to worry, as there is a lot of coal in Russia.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.