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Nippon Oil Buys Crude From Sakhalin-1 Under Long Term Contract

Nippon Oil Corp., Japan's largest refiner, signed a long-term contract to buy Russian oil from Sakhalin island, the first such agreement by the country's refiners in a drive to diversify supply from the Middle East.

Nippon Oil will purchase one vessel of oil, or 720,000 barrels, every quarter from the $13-billion Sakhalin-1 project starting this year, said people who declined to be identified because the deal is confidential. Quantities and other conditions will be re-negotiated within three years, they said.

Japan gets 87 percent of its crude oil from the Middle East and can reduce costs for the fuel by buying from Sakhalin, a four-day sea journey to Japan compared with more than two weeks from the Persian Gulf. Dubai crude oil, a price benchmark for Asian buyers, has surged 64 percent in the past 12 months.

``Buying oil from Sakhalin is an obvious option because it's so close to Japan; the buyer can benefit from lower shipping costs,'' Hirofumi Kawachi, an energy analyst at Mizuho Investors Securities Co., said in a phone interview.

Crude exports from the Exxon Mobil Corp.-led Sakhalin-1 project began in August 2006, after it completed pipelines from the island to DeKastri terminal on the Far Eastern coast of Russia. The distance from the port by sea to northern Japan is about 650 miles, compared with 6,600 miles from Japan to Saudi Arabia.

All six major Japanese refiners, including Idemitsu Kosan Co. and Showa Shell Sekiyu K.K., have bought individual cargoes of so-called Sokol crude oil from Sakhalin to test the light, low-sulfur grade oil, which produces more higher-priced fuels such as a gasoline and jet fuel. TonenGeneral Sekiyu K.K., a refining unit of Exxon Mobil, buys Sokol from its parent.

Other Suppliers

The amount Nippon Oil purchases will account for less than 1 percent, or about 8,000 barrels a day, of the company's refining capacity of 1.15 million barrels a day.

``In terms of volumes, the Middle Eastern suppliers are still dominant, yet it's good to develop a rich portfolio of suppliers,'' Kawachi said.

Nippon Oil will buy the crude under contract from Sakhalin Oil and Gas Development Co., which owns 30 percent of Sakhalin-1.

Sakhalin Oil & Gas Development is a consortium between Japan's government and companies. The government holds 50 percent of the venture, while Itochu Corp. and its unit own 18.12 percent. Japan Petroleum Exploration Co. has 14.46 percent and Marubeni Corp. 11.68 percent.

Exxon Neftegas Ltd., an affiliate of Exxon, owns 30 percent of Sakhalin-1 and is operator of the project that has estimated recoverable reserves of 2.3 billion barrels. Other partners are two affiliates of Russia's OAO Rosneft that own a combined 20 percent and India's state-owned oil company ONGC Videsh Ltd. that also has 20 percent.

Russian Oil

Japan's imports of Russian crude oil are expected to rise as other projects boost production.

The OAO Gazprom-led Sakhalin-2 oil and gas venture completed pipelines in November last year to an ice-free oil export terminal at Ariva bay, south of Sakhalin island.

The pipelines will allow the $22 billion Sakhalin-2 project to export oil throughout the year, because ice in the north blocks tanker traffic in winter.

Imports of Russian oil to Japan quadrupled in 2007 to 6.99 million kiloliters (44 million barrels) compared with 1.71 million kiloliters a year ago, according to the latest data from the trade ministry.

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