Russian energy roulette spooks
Japanese By Hisane Masaki
TOKYO - The imbroglio over the huge
Sakhalin-2 oil-and-gas project in Russia's Far
East involving two Japanese firms has cast a cloud
over resource-poor Japan's new national energy
strategy. It has also served as a fresh reminder
that Japan's economic power seems to have lost
much of its luster, at least in the eyes of the
Russians.
Last month, the Russian Natural
Resources Ministry froze a key environmental
permit for the project off the coast of Sakhalin
Island, citing problems with conservation. The
decision drew
immediate protests from Japan
and the European Union. Prime Minister Shinzo Abe,
who was still his predecessor Junichiro Koizumi's
chief cabinet secretary, said a major delay to
Sakhalin-2 could hurt diplomatic relations.
Japan's ambassador to Moscow, Yasuo Saito,
was blunter. He criticized the "unilateral"
Russian decision as "lacking transparency". The
British government said it was "deeply concerned".
The project is operated by an
international consortium called Sakhalin Energy,
in which Royal Dutch Shell has a 55% stake.
Japanese trading firms Mitsui and Co and
Mitsubishi Corp hold shares of 25% and 20%,
respectively.
Natural gas taken from two
fields off the northeast coast of the island will
be transported through an 800-kilometer pipeline
to Prigorodnoye, in the island's southernmost
part, where it will be liquefied and shipped to
Japan, South Korea and the United States.
To be sure, even before Moscow began
looking into the environmental problems
surrounding Sakhalin-2, Russian and foreign
environmental groups had raised strong questions
about the project. But the stunning Russian move
is widely believed to be a veiled ploy to pressure
Sakhalin Energy to reshape the original 1990s deal
to the Kremlin's benefit.
With prices for
crude oil and other natural resources rising or at
least stuck at high levels, the Russian
administration of President Vladimir Putin has
been promoting a strategy to place energy under
national control. The major oil company Yukos,
which was hostile to the government, was charged
with tax evasion and eventually forced to
dissolve.
Sakhalin-2 is the only wholly
foreign-funded project among major resource
development programs in Russia. There has
therefore been growing discontent in Russia over
the project, with some saying it is based on an
"unequal treaty" that bars Russian companies from
taking part, and which severely restricts the
country's share of the profits.
Russia's
gas-export monopoly Gazprom agreed last year to
acquire a 25% stake in Sakhalin-2 in exchange for
ceding to Royal Dutch Shell a stake in its big gas
field in western Siberia. But talks stalled after
the Sakhalin-2 operator announced it would double
costs to US$20 billion because of higher steel
prices and the weaker US dollar. There were also
plans in effect for Mitsui and Mitsubishi to
transfer a combined total of 5 percentage points
of their stakes to the Russian company.
Putin acknowledged on Friday that the
conditions of the contract, known as a
production-sharing agreement, and increasing costs
for Sakhalin-2 are disadvantageous for his country
because Russia cannot receive any profits until
the project operator recoups the investment cost.
In what appears to be the latest in a
series of Russian efforts to take greater control
of domestic energy resources, Gazprom said this
month that it will develop the giant Shtokman
natural-gas field in the Barents Sea alone, a
disappointing move for five foreign companies,
including US oil majors Chevron Corp and
ConocoPhillips, that had been on a short list to
partner with Gazprom on the $20 billion project,
one of the world's largest undeveloped gas fields.
Optimism on both sides In what
was seen by some as a conciliatory tone, however,
Russian Natural Resources Minister Yuri Trutnev
gave Sakhalin-2's operator a month - until the end
of October - to come up with plans to rectify what
they called major environmental violations before
a possible shutdown of the $20 billion operation.
The plans will be submitted to the minister this
week.
Royal Dutch Shell's chief executive
said that the company has fully addressed all
ecological issues and is seeking dialogue with the
Russian authorities. "Although the project has
faced significant environmental challenges, we
firmly believe these have been fully and
transparently addressed," Jeroen van der Veer told
an investment advisory council chaired by Russian
Prime Minister Mikhail Fradkov.
"This
project is 80% complete now with all LNG
[liquefied natural gas] pre-sold under long-term
contracts ... We are confident that all remaining
issues can be resolved through our ongoing,
constructive and fair dialogue with the Russian
government."
Trutnev said that if the
company's plan is acceptable, the development
won't be stopped, and noted that he had received
assurances from the Royal Dutch Shell head that
the energy giant is working to resolve the
problems. Trutnev praised the company for taking a
more constructive approach to Russia's
environmental concerns than has been the case to
date.
"My meeting ... with van der Veer
represents a 180-degree about-turn," Trutnev said.
"He talked about existing violations, about
ecological standards and how they have already
started improving the situation." Trutnev noted,
however, that "absolutely any sanctions" are
possible if the proposals prove unsatisfactory.
Trutnev's ministry will announce the results of
its environmental probe into Sakhalin-2 as early
as this week.
Japanese Minister for
Economy, Trade and Industry Akira Amari also
expressed optimism recently about the fate of
Sakhalin-2. Amari said he thought there would be a
resolution between the operator Sakhalin Energy
and the Russian government over the recent
problems. "One way or another, Sakhalin-2 will be
resolved," Amari said. "The basic contract hasn't
been nullified." Amari said he thought Sakhalin
Energy would be able to convince Moscow of its
efforts to deal with the environmental issues.
The Sakhalin-2 project is expected to turn
out 9.6 million tons of LNG a year from 2008.
Eight Japanese companies, including Tokyo Electric
Power Co, Tokyo Gas Co and Chubu Electric Power
Co, have agreed to purchase 4.73 million tons per
year - equivalent to 8% of Japan's LNG imports in
fiscal 2005. The initial impact on Japan of a
delay in imports from the project might be
limited. But if there were a prolonged suspension,
the impact could be far-reaching.
Japan is
the world's largest LNG importer, purchasing 58
million tons of LNG from abroad in 2005, of which
25% was from Indonesia. Most of Indonesia's
long-term LNG supply contracts with East Asian
countries, such as Japan, China, Taiwan and South
Korea, start expiring from 2010. Indonesia is
poised to cut in half its Japan-bound exports of
gas when long-term contracts expire in 2010 to
boost the availability of natural gas for domestic
industries amid decreasing natural-gas production
at home.
If imports from Sakhalin-2 are
delayed for an extended period, affected Japanese
companies would need to find alternative
suppliers. It remains to be seen, however, whether
Japan will be able to secure the same volume it
has been importing up until now, as countries with
large energy demands, such as China and India, are
increasing their imports of LNG. In 2010, China
and India are expected to need an additional 5
million tons and 8 million tons, respectively,
compared with current levels.
The island
of Sakhalin also started producing and exporting
crude oil in 1999, with exports to Japan beginning
in 2001. In 2005, the area provided Japan with
10.89 million barrels, accounting for about 1% of
the country's crude-oil imports. The new pipeline,
scheduled to start operating in late 2007, will
allow crude oil to be exported year-around,
instead of only in summer at present.
Headwinds against Japan's energy
security The Sakhalin issue has come at an
awkward time for Japan, which adopted this year
the "New National Energy Strategy". The new
strategy reflects growing Japanese concerns about
energy security in the medium and long terms amid
high oil prices and an intensifying global rush
for oil, gas and other resources, led by China and
India.
Japan imports almost all of its
oil, about 90% of which comes from the volatile
Middle East. Japan is also the world's largest LNG
importer. Japan is struggling to diversify the
suppliers of oil, gas and other energy resources.
The new strategy, adopted in late May, also calls
for, among other things, increasing the ratio of
oil developed and imported by domestic companies -
from 15% to 40% of total imports by 2030.
But this 40% target for "Hinomaru oil" has
become even more difficult to achieve following
Japan's recent agreement to give up its
controlling interest in the $2 billion development
of Iran's massive Azadegan oilfield amid tensions
over Tehran's nuclear program.
After days
of hectic haggling, Japan's Inpex Corp, a core
firm of Inpex Holdings Inc, and National Iranian
Oil Co reached a basic agreement early this month
on a major cut in the largest Japanese oil and gas
developer's stake in the oilfield, in southwestern
Iran, to 10% from 75%. Inpex Corp will also return
its status as operator of the project to the
state-owned Iranian oil company. Still, Inpex Corp
is expected to maintain the right to import crude
oil from the field in the future with the 10%
stake.
Meanwhile, Russia's energy-resource
nationalism could spill over into another major
project on Sakhalin - the $12.8 billion Sakhalin-1
project, managed by an international consortium
led by US oil major ExxonMobil Corp. The project
cost is now said to have increased to $17 billion.
Russia's environmental watchdog,
Rosprirodnadzor, reportedly plans to check the
project to determine whether it complies with
environmental-protection laws after finishing such
a check on Sakhalin-2. Other consortium
participants include Tokyo-based Sakhalin Oil and
Gas Development Co (SODECO), owned by the Japanese
government and private sector, and Russia's
state-owned oil firm Rosneft. The Russian firm has
a 20% stake in the project.
In yet another
blow to Japan's energy security, exports of
natural gas from Sakhalin-1 could all go to China.
ExxonMobil, which holds the right to decide which
parties receive natural-gas exports, reportedly
concluded this month a provisional contract with
China's state-run China National Petroleum Corp
(CNPC) on the import via a pipeline of about 6
million tons (in liquefied conversion) of natural
gas to be produced at Sakhalin-1. ExxonMobil and
CNPC reportedly plan to conclude a formal contract
a year later.
The Sakhalin-1 development
started on the condition that all of the 6 million
tons of natural gas for export purposes - the
amount excluding that to be taken by Russia -
would be exported to Japan. SODECO reportedly
agreed to the provisional contract on the
condition it receives 30% of proceeds from exports
to China. SODECO is jointly funded by Japan
Petroleum Exploration Co, Japan National Oil Corp,
Itochu Corp and Marubeni Corp. SODECO owns the
right to acquire 30% of resources available from
the project. Japan's imports of oil from
Sakhalin-1, which began this month, will not be
affected, but no natural gas may be exported to
Japan.
Meanwhile, Japan and China have
lobbied for alternative routes for a pipeline from
eastern Siberia's oilfields to Pacific Rim
nations. Russia has played the two energy-hungry
Asian nations against each other. Japan failed to
gain a guarantee that Russia will give priority to
building a "Pacific route" from Taishet near Lake
Baikal to Perevoznaya Bay near Nakhodka on
Russia's Pacific coast via the halfway point at
Skovorodino, near the Russia-China border, rather
than to building a "China route" heading to
Daqing, northeastern China, from Skovorodino.
Russian state pipeline monopoly Transneft
is building the pipeline in two stages. It expects
to finish the first stage at Skovorodino in 2008.
Construction work on the first stage linking
Taishet and Skovorodino began in late April. No
date has been set for the second stage. There are
strong expectations that imports of oil from
eastern Siberia through the proposed pipeline to
Russia's Pacific coast, if and when they go into
full swing, will help diversify oil sources and
contribute to stable oil supplies to Japan in the
long term.
Tokyo has been asking the
Russian government to sign an intergovernmental
agreement pledging that it will build the entire
route of the projected 4,188km pipeline. But
Moscow has rejected the Japanese request and said
its priority now is to explore and develop the
untapped reserves of eastern Siberia to provide
the oil to fill the pipe. Although Inpex Corp and
trading houses have been considering joining the
Siberian project, they are waffling in view of the
lack of a Russian government guarantee that Moscow
will build a pipeline that could deliver oil up to
the Russian Pacific coast - and then to Japan.
Japan on the diplomatic
defensive Japan once controlled the lower
half of Sakhalin Island. After World War II this
territory, and the string of islands to the south
called the Kurils, was ceded to the Soviet Union.
Tokyo no longer has territorial claims on
Sakhalin, but sovereignty over the Kurils has been
in dispute for decades.
Not so long ago,
it was thought that Japan's trump card in the
ongoing negotiations was its ability to develop
the rich resources of the Russian Far East.
However, what the Japanese government officials
have long taken for granted as a negotiating chip
- Japan's economic power - seems to have lost much
of its luster, at least in the eyes of Russian
leaders. For Russia, the strategic significance of
Japan has declined.
The current situation
is a stark contrast with just about a decade ago
when Putin's predecessor Boris Yeltsin made what
the current Russian government now thinks were too
many concessions on the territorial row, driven by
the need to seek Japanese help in turning around
the then ailing Russian economy. While Japan's
economic power has been relatively on the decline
after the burst of the asset-inflated "bubble
economy" of the late 1980s, the Russian economy
has been barreling ahead in recent years, thanks
to high prices of crude oil, the country's main
export item. Russia, the world's second-largest
oil producer, has posted robust economic growth,
and its gold and foreign-currency reserves have
hit record high levels.
These days, the
attraction of the Russian economic magnet for
Japan seems even stronger than that of the
Japanese one for Russia. Japan's direct investment
in Russia jumped more than sevenfold in fiscal
2004, which ended in March 2005, to $51 million,
from fiscal 2003, although the figure represented
a still minuscule 0.1% of the country's overall
direct investment abroad.
The two biggest
Japanese auto makers, Toyota Motor Corp and Nissan
Motor Co, have decided to build assembly plants in
St Petersburg. In the energy sector, too, Japanese
companies are investing billions of dollars to
help extract oil and natural gas in nearby regions
of Russia, including the Sakhalin-1 and Sahkalin-2
projects.
Many analysts say, however, that
if Russia courts foreign capital in rough times
but then twists the law to its own ends in good
times, foreign companies, including Japanese ones,
will become reluctant to invest in the country. It
will not be in the interests of Russia in the long
term, they say.
There is growing
international distrust toward Moscow, particularly
with regard to energy security. At this July's
Group of Eight summit in St Petersburg, where
energy security was high on the agenda, Putin
failed to dispel the distrust. In January, Russia
temporarily stopped gas supplies to Ukraine in a
price dispute. All of this has stirred
considerable alarm among European countries that
depend heavily on oil and natural gas supplied by
Russia.
In St Petersburg, the G8 leaders
agreed on an action plan to bring greater
stability to energy markets. The program will
promote development of more transparent and
predictable energy markets and support
energy-saving programs. If Russia wants to attract
more foreign investment in its energy sector, it
needs to win the confidence of potential
investors, many analysts say.
On the oil
pipeline linking eastern Siberia with Russia's
Pacific coast, some Japanese government officials,
concerned about the future possibility of a sudden
halt to supplies as happened to Ukraine, have
begun to ask: Will the pipeline actually
contribute to ensuring Japan's energy security?
Prime Minister Fradkov is expected to
visit Tokyo by the end of the year. Topping his
agenda will be energy issues, including Sakhalin-2
and the Pacific-route oil pipeline. Fradkov's
Japan visit will be preceded by a meeting of the
trade and economic committee between the two
governments, co-chaired by Japanese Foreign
Minister Taro Aso and Russian Energy and Industry
Minister Viktor Khristenko.
Hisane
Masaki is a Tokyo-based journalist,
commentator and scholar on international politics
and economy. Masaki's e-mail address is
yiu45535@nifty.com.
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