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Japan may be denied Sakhalin-1 gas

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In another hard blow to the nation's energy security, exports of natural gas from the energy resource development project Sakhalin-1 could possibly all go to China, it was learned Friday.

The major U.S. oil firm Exxon Mobil Corp., which heads the Sakhalin 1 project, concluded earlier this month a provisional contract with China's state-run China National Petroleum Corporation (CNPC) on the import of about 6 million tons (in liquefied natural gas conversion) of natural gas to be produced at Sakhalin-1, according to several sources.

The Sakhalin-1 project is an international program for energy resource development off Russia's Sakhalin Island. Japanese, Indian, Russian and U.S. corporations are part of the consortium.

However, Exxon holds the right to decide which parties receive natural gas exports.

It is highly likely that when a formal contract is concluded, Japan will not be able to import natural gas from the project, according to the sources.

Coupled with recent failures at the oil field development at Iran's Azadegan oil field as well as the Sakhalin-2 project, this latest problem could force Japan to revise its energy strategy, said observers.

According to the provisional agreement, all 6 million tons of natural gas, the amount excluding that to be taken by Russia, will be exported to China via a pipeline.

Total development costs for the Sakhalin-1 project is said to be about 17 billion dollars (about 2 trillion yen).

Currently, Japan's Sakhalin Oil and Gas Development Co. (SODECO), jointly funded by Japan Petroleum Exploration Co., Japan National Oil Corporation, Itochu Corp. and Marubeni Corp., is participating in the Sakhalin-1 project. SODECO owns the right to acquire 30 percent of resources available from the project.

Japan's claim to the project will still be maintained even after China and Exxon Mobile conclude the provisional contract. Imports of oil from Sakhalin-1 will not be affected, but no natural gas may be exported to Japan, the sources said.

SODECO agreed to the provisional contract on the condition it receives 30 percent of proceeds from exports to China.

As Exxon and CNPC will spend a year to decide the terms for a formal contract, there still is a possibility that Japan could turn the tables.

The development started on the condition that all of the 6 million tons of natural gas for export purposes would be exported to Japan.

However, negotiations between the Japanese side and Exxon faced rough going as the Japanese side wanted exports via ships by converting natural gas into liquefied natural gas for electricity and gas companies' convenience, while Exxon wanted to use pipelines for exports.

Though China, which has participated in the negotiations since 2004 with the aim of securing a massive amount of energy resources, accepted exports via a pipeline and at the final stage of negotiations increased the purchase price, according to the sources.

Japan imports about 60 million tons of LNG a year.

© The Yomiuri Shimbun

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