USA VS RUSSIA: JAPAN LOSE
China's deal Wednesday to buy Russian natural gas points to the advantage it holds over East Asian rival Japan, which also wants Russian energy but has to accommodate the concerns of its ally, the U.S.
Japan's government is a partner with OAO Rosneft in an energy venture called Sakhalin-1 in the Russian Far East. U.S. sanctions have targeted Rosneft's chief, Igor Sechin, although not the company itself. Japan also relies on the nearby Sakhalin-2 field in Russian waters for about 10% of its supplies of natural gas, putting Tokyo at risk should the U.S. ratchet up pressure on Moscow.
Energy specialists say Japan's commitments to the Russian projects—and its strong demand for fossil fuels in the wake of its 2011 nuclear accident—make it hard to pull back now.
"Russia is looking even more to Asia than before. If Japanese companies hesitate to do business, it would be China that picks up the windfall gains," said Nobuo Tanaka, a former executive director of the International Energy Agency who is now a professor at Tokyo University.
Still, Japan's alliance with the U.S. makes it harder to woo Russia unreservedly.
Japan's trade and industry minister, Toshimitsu Motegi, was asked this week whether the Ukraine conflict might affect Japanese investment in Sakhalin-1. Mr. Motegi showed deference to Washington by denouncing what he described as Russian efforts to interfere with Ukraine's sovereignty.
When pressed on what steps Japan might take to express its displeasure, Mr. Motegi would say only, "We'll keep watching the situation."
Japan and Russia have had tense relations for decades, in part because of their territorial dispute over a set of islands seized by Soviet forces in the closing days of World War II.
After the fall of the Soviet Union, the countries put aside their differences to team up in Sakhalin, an island off Russia's Far East coast. A consortium led by the Japanese government owns 30% of Sakhalin-1, which produces about 250,000 barrels a day of oil for export mainly to Japan and South Korea. Its partners are Exxon Mobil Corp., which operates the facility and owns 30%, as well as Rosneft and India's state-owned Oil and Natural Gas Corp., with 20% each.
As for the Sakhalin-2 project, Japanese trading companies Mitsui & Co. and Mitsubishi Corp. have 12.5% and 10%, respectively. Russia's OAO Gazprom owns 50% and Royal Dutch Shell PLC holds 27.5%.
Although Gazprom's move in 2007 to take control of Sakhalin-2 made waves at the time—Shell had to give up control after Russian authorities threatened to pull the venture's environmental permit—the project has been a stable supplier of liquefied natural gas for Japan and South Korea since it started deliveries in 2009.
Japan imported 8.6 million metric tons of LNG from Russia in 2013, compared with none in 2008. Almost all of that came from Sakhalin-2.
Sakhalin-1, with at least half the natural gas reserves of Sakhalin-2, could also become a big supplier if the partners could agree on how to transport it. Tokyo would like the gas to be liquefied and shipped to Japan. Exxon Mobil previously agreed to supply China via a pipeline, but that deal was nixed by Russian authorities.
The vying to gain access to the fuel underscores the conflicts between Asia's two largest economies. As a result of the stalemate, the $24 billion project has hardly made use of its gas even though it started shipments of crude oil in 2006.
Besides the Sakhalin projects, Gazprom plans to build an LNG export terminal with an annual capacity of 15 million tons around Vladivostok, with cooperation from the Japanese government in marketing and financing. The first facility with an annual capacity of 5 million tons will be commissioned in 2018, according to Gazprom's website.
However, the supply of LNG from the Vladivostok project is uncertain because of Russia's plans to pipe more gas to China.
Four years ago, Japanese energy company Inpex Corp., 19% owned by the government, was forced to pull out of an oil project in Iran to comply with U.S.-led sanctions. But energy specialists say they don't see a similar scenario affecting investments in Russia.
"This is different from Iran. The volume of energy Russia produces is much bigger," said Sergey Milanov, a partner at law firm K&L Gates who advises companies on Japan-Russia energy projects. He said it was "hard to imagine...comprehensive sanctions."
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