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Russia’s economic roulette

Japanese government compiled in May an energy policy outline titled "New National Energy Strategy," with the aim of increasing its ratio of independent oil development. However, its plan has already taken a battering thanks to a unilateral Russian ruling.

The Russian Natural Resources Ministry has decided to cancel the permit for the Sakhalin-2 natural gas development project off the coast of Sakhalin Island, citing problems with environmental conservation.

The project's investors are Royal Dutch Shell PLC, Mitsui & Co., and Mitsubishi Corp. It is the only scheme fully funded by foreign capital among major resource development programs in Russia.

However, there has been growing discontent in Russia over Sakhalin-2, 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.

The ministry's decision to cancel the undertaking is being seen as a move by Russia to strengthen its position, and increase its role in the project.

Russian President Vladimir Putin's administration has been promoting a strategy to place energy under national control. Major oil company Yukos--which was hostile to the government--was charged with tax evasion and forced to dissolve.

Russian government-run gas company OAO Gazprom had been seeking to join the Sakhalin-2 project: Negotiations were already under way calling for Dutch Shell to transfer 25 percentage points of its stakes in Sakhalin-2 to Gazprom, in return for rights and interests in oil fields in West Siberia. There were also plans in effect for Mitsui and Mitsubishi to provide a combined total of 5 percentage points of of their stakes to the Russian company.

According to Japanese energy industry sources, Gazprom was dissatisfied with the negotiations, as it had reportedly hoped to gain more than 50 percent of the shares in an attempt to seize complete control of the scheme.

A dark shadow would be cast over Japanese energy supplies if the Sakhalin-2 project were to be suspended. The project is expected to turn out 9.6 million tons of liquefied natural gas 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 percent of Japan's gas imports.

The initial impact of a delay in imports from the project might be limited. However, it would be a different story if there were a prolonged suspension. Japan will shortly be renewing its long-term LNG import contracts. However, whether it will be able to secure the same volume it has been importing up until now is uncertain, as countries with large energy demands such as China and India are increasing their imports of LNG.

TEPCO President Tsunehisa Katsumata, who is also president of the Federation of Electric Power Companies, said at a press conference on Sept. 22 "it would be a hard story as a whole" if Japan could not procure LNG from Sakhalin-2.

How should Japan cope with the situation hereafter?

Firstly, it is important for the government not to get flustered. Russia's objective is to maneuver itself into an advantageous position vis-a-vis its participation in the project, rather than postponing the construction work. The project itself will not get going unless Japan is assured of procuring LNG from Sakhalin-2.

Japan should draw international attention to Russia's coercive approach to the project. In a statement issued on Sept. 19, European Commission Energy Commissioner Andris Piebalgs strongly denounced Russia for canceling the permit for the Sakhalin-2 project, saying the country needs to improve its environment for investment, so that safe and predictable transactions can be conducted.

Japan should work in close conjunction with the EU in seeking Russia's reconsideration.

In response to a strong request from the Putin administration, Toyota Motor Corp. and Nissan Motor Co. have decided to construct auto assembly plants in St. Petersburg. Russia is trying to boost employment through the introduction of foreign capital while aiming at steady economic growth.

However, foreign companies will avoid investing in Russia if it keeps taking unilateral steps. Japan should strongly warn Russia of this possibility.

© The Daily Yomiuri

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