Japan believes Russian oil deals may help islands dispute

Oct 04, 2005 02:00 AM

Japan's government said it wants joint development of oilfields in Russia to help resolve a territorial dispute that has prevented a peace treaty between the neighbours since World War II.
Japan and Russia both claim four islands that were occupied by Soviet forces at the end of the war.

Japan's investment in the $ 12.8 bn Sakhalin-1 project, led by ExxonMobil, may help it gain access to other Russian oil and natural gas ventures, including a proposed oil pipeline from Siberia to the Pacific, Koichi Hirata, parliamentary secretary for the Ministry of Economy, Trade and Industry, said on Oct. 2.
“I hope it would go to resolve territorial claims between the two countries,'' Hirata told Sakhalin regional Governor Ivan Malakov and other officials in the provincial capital, Yuzhno-Sakhalinsk, during ceremonies to mark the start of production from the Sakhalin-1 project.

The territorial dispute and energy cooperation may be raised during a planned visit by Russian President Vladimir Putin to Tokyo in November. Japan is competing for Russian oil and gas with China to reduce reliance on Middle East supplies. In 2003, Japan offered Russia $ 7 bn to help fund the 4,200-km (2,610-mile) oil pipeline to the Pacific. China is lobbying Russia to first build an oil pipeline from Siberia to the city of Daqing.
“Competition with China is an ever-increasing worry for Japan and a stronger relationship with Russia is key, especially as Russia begins to step up production of oil again,'' said Kirby Daley, a strategist at Societe Generale Securities' Fimat unit in Hong Kong.

Russian oil production may rise by 17 % to as high as 550 mm tpy (11 mm bpd) in 10 years, from about 470 mm tons this year, Energy and Industry Minister Viktor Khristenko said. Output this year and next is expected to increase by 2.5 %, he said.
Sakhalin-1 is the first of five projects on Sakhalin island that may secure supplies for Asia and allow the region to reduce its dependency on the Middle East. Royal Dutch Shell will start supplying 9.6 mm tons of liquefied natural gas from its $ 20 bn Sakhalin-2 project in 2008.
“Clearing up the long-standing stumbling block of the Kuriles dispute should be a logical goal of Tokyo on a higher level,'' Kirby said. “If it takes this energy deal to be the catalyst it bodes well for future Russia-Japan relations as well.''

Resolving the dispute over the four islands, which lie near Japan's main northern island of Hokkaido and are known as the Southern Kuriles in Russia and the Northern Territories in Japan, may help boost Japanese investment into Russia. Areas such as Khabarovsk and Sakhalin that lie closest to Japan, Asia's biggest economy, may be the main beneficiaries.
Japan made $ 5.9 bn of foreign direct investment into China in 2004, compared with $ 49 mm in Russia, according to balance of payments data compiled by Japan External Trade Organization. Russia's Industry and Energy Ministry isn't able to comment on how Japanese participation in oil and gas projects may relate tothe dispute over the islands until Oct. 7 at the earliest, ministry spokesman Evgeny Vernikov said in Moscow.

ExxonMobil owns 30 % of Sakhalin-1. Japan's government and companies through Sakhalin Oil & Gas Development Co., or Sodeco, also have 30 %. Sodeco includes state-owned Japan Oil, Gas & Metals National Corp., Inpex, Japan Petroleum Exploration, Itochu, Marubeni and Teikoku Oil. The other partners include Russia's Rosneft and India's Oil & Natural Gas Corp., each with 20 %.
Sakhalin-1 started producing oil and gas in Far East Russia a decade after the government and partners signed a contract to share production.
“It was important to implement the first major energy project with Russia,'' Hirata said. “It is also an important basis for cooperation on a Pacific oil pipeline.''

On Oct. 1, Hirata and Energy Minister Khristenko attended a ceremony near Nogliki, the town in northern Sakhalin closest to Sakhalin-1's Chayvo field. Hirata is the fourth-highest-ranking official in the trade ministry after Minister Shoichi Nakagawa and the two senior vice ministers, Hachiro Okonogi and Sanzo Hosaka.
First production from Sakhalin-1 is flowing to the Khabarovsk region on the Russian mainland, the partners said Oct. 2 in Yuzhno-Sakhalinsk, Russia. Oil production will rise to 250,000 bpd in late 2006 from an initial 50,000 barrels and an export gas pipeline to China may be built within five years, said Stephen Terni, president of operator Exxon Neftegaz.

Sakhalin-1 may reach an agreement in 2006 to export gas to China National Petroleum Corp., the nation's biggest oil company, Terni said. China, the world's fastest-growing major economy, is the “number one priority'' for gas sales in Asia, Alexander Medvedev, deputy chief executive of Russia's monopoly exporter Gazprom, said on Sept. 21.
ExxonMobil and its partners signed contracts on Sept. 26 to supply 1 bn cm of gas a year to customers in Khabarovsk region in Russia's Far East. The project's initial production is 1.7 mm cm of gas a day,which can increase to more than 7 mm cmpd, Terni said.

The project's oil and gas fields may hold as much as 485 bn cm of gas, enough to meet China's needs for almost 15 years, and 2.3 bn barrels of oil.
Oil exports will begin in the second quarter of 2006 from a terminal at the De Kastri port in Khabarovsk. The terminal will allow tankers to ship oil all year, including months when ice covers the Sea of Okhotsk, which surrounds Sakhalin.

Source: Bloomberg
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