Aujourd’hui les médias russes sont pleines de reportages sur deux événements clefs dans le domaine énérgetique: la conclusion des accords avec la Chine pour crédits de grand envergure contre approvisionnement pétrolière à long terme et l’ouverture de la première installation de production GNL en Russie sur l’île de Sakhalin. Tous les deux projets vont changer dans une manière significative la proportion des exports hydrocarbures russes vers l’Asie.
Une Note par Gilbert Doctorow
The Eastward Shift of Russian Energy Exports
By Gilbert Doctorow, Ph.D.
This has been a hectic week for Japanese Prime Minister Taro Aso. Tuesday’s visit by U.S. Secretary of State Hillary Clinton ended with the announcement that he will be the first foreign guest of the Obama administration on a visit scheduled for February 24th. Meanwhile he had to cope with the political fall-out of the resignation of his Finance Minister. And yesterday he was on the Russian island of Sakhalin for the opening of Russia’s first LNG facility, in which Japanese companies Mitsui & Co., Ltd and Mitsubishi Corporation have important stakes and for which Japan will be a major customer, receiving 7.3% of its overall natural gas requirements once full-scale production is underway next year. In general, Japan has extended credits worth $5.3 billion to the Sakhalin-2 project of which the LNG facility is the showpiece (REGNUM Information Agency).
The Russian print and electronic media devoted considerable space to the economic aspects of this new facility, and I will summarize the main elements below. Meanwhile, the political dimension, which is at least as important, was the focus of a lengthy article in Kommersant daily: this was the first visit to Sakhalin by a Japanese head of government since the end of WWII. The newspaper featured an exclusive report from the ITAR-TASS correspondent in Japan, Vasily Golovnin.
Golovnin informs us that Taro Aso’s visit came at the invitation of Russian President Dmitry Medvedev during a telephone call on January 24. Aso was told that this would be a good opportunity to discuss any and all issues, including the territorial dispute surrounding the four southern islands in the Kurile chain that Japan claims as its own.
Indeed, ever since the expulsion of more than 300,000 Japanese from Southern Sakhalin at the end of the war, some Nipponese patriots claim that Sakhalin also should rightfully revert to Japan. A number of Tokyo newspapers are said to have called upon the Premier not to accept the Russian invitation for these reasons.
Golovnin’s contacts in the Japanese Ministry of Foreign Affairs pointed to the Premier’s refusal to listen to extremists and his decision to come as a “clear and definitive confirmation of the sovereignty of Russia over Sakhalin.” Moreover, the ministry stated that: “The present visit generally is expected to demonstrate to the Japanese how close Russia is to us, in the literal sense of the word. The Premier is flying to Sakhalin in the morning and already in the evening he is back in Tokyo, where he is awaited for debates in Parliament.”
Tokyo has been hoping that the growing economic crisis and the desire to find new markets for its energy exports, shifting weight from Europe will lead Russia to be more accommodating over their old territorial disputes. The Ministry of Foreign Affairs believes the Russians are already backpedaling from the statements made several years ago that the Russian Federation “has no superfluous territory,” meaning that the Kuriles were not up for discussion. Now the Japanese expect to reach a compromise “somewhere in the middle.”
We are not told what progress if any was made yesterday in private talks between the Russian and Japanese leaders. The public speech by Medvedev at the opening ceremony did not go beyond common places. He said that the Sakhalin-2 project has strategic importance for his country, consolidating its position as the world’s largest gas exporter and ensuring its continuation for decades to come given the long term supply contracts that have been signed. He hoped the project would also exert a major positive influence on relations with neighboring countries.
For his part, at the opening of the plant, Prime Minister Aso expressed his satisfaction with Japan’s participation in a project which will help diversify sources of energy supplies, which satisfies the long-held dream of obtaining energy close to home and which shows off Japan’s most advanced technical achievements in gas production.
Among other foreign dignitaries attending the opening ceremony was Dutch Minister for Economic Affairs Maria van der Hoeve, who has been monitoring the participation in Sakhalin-2 of Royal Dutch Shell. She appears not to have been dissuaded from close cooperation with the Russians despite the muscular measures they took in 2007 to wrest control of Sakhalin-2 from Shell (now a 27% share holder). In particular, van der Hoeve has been involved in energy matters with the Russians closer to home, having encouraged the inclusion of N.V. Nederlandse Gasunie in Russia’s Nord Stream project to channel natural gas directly into Western Europe, bypassing transit countries, via a pipeline under the Baltic Sea. In June 2008, this resulted in Gasunie taking a 9% stake in Nord Stream, alongside E.On Ruhrgas, Winterhall Holding and majority owner Gazprom.
Another notable visitor was British Prince Andrew, who first came to Sakhalin five years ago as the government’s special representative for international trade and investment. The Duke of Kent’s presence was related to the role of British Petroleum as one of the contractors in the oil and gas projects in Sakhalin. In his speech, he joined others praising Russia as a dependable partner and supplier of energy resources.
The newly commissioned LNG plant is one of the world’s largest, with a rated capacity of 10 million tons per year, representing 5% of total global supplies. During the start-up phase in 2009, it will produce 4.5 million tons. The first export shipments to Japan are scheduled for March. Sixty-five percent of the LNG output of Sakhalin-2 has been pre-sold to Japan under 20-year long supply agreements. A further 20% will go to customers in North America and the balance is being purchased by South Korea. In the U.S., this new Pacific region source of supply will address a major imbalance: at present nearly all LNG shipments arrive on the East Coast.
Construction of the LNG facility began in 2003 and it has cost $3.9 billion through this month. An additional $600 million was spent on infrastructure development serving the facility. The gas comes from offshore platforms of the Piltun-Astokhskoye and Lunskoye oil and gas fields situated near the northeastern coast of Sakhalin. It is brought to the plant in the south of the island by an 800-km long pipeline (Neftegas.ru). The reserves of this particular field are estimated to be 1.1 billion barrels of oil and 150 billion cubic meters of natural gas. Whereas oil has been in production there since 1999, commercial operation of the gas field began only in January.
News channel Vesti quotes Ian Craig, CEO of Sakhalin Energy, the company in charge of the overall Sakhalin-2 oil and gas project and the present owner of the LNG plant, as saying that when construction work was at its peak the project had 25,000 employees from 45 countries.
By a curious coincidence, this week marked another milestone in the development of Russia’s Far Eastern energy supply capabilities. At a meeting in Beijing of state and industry delegations led by Russian Deputy Prime Minister Igor Sechin, who is also the Rosneft Chairman, and Chinese Deputy Premier Wang Qishan, it was announced that the China Development Bank has agreed to provide $25 billion of financing at very favorable rates (reportedly LIBOR + 3.5%) for 20 years in return for a Russian commitment to deliver 300,000 barrels of oil per day (15 million tons per year) for the same 20 year period.
According to Vedomosti, both the size and duration of the loan are unprecedented and the same is true of the duration of the oil supply contract. However, this is not the first time China and Russia have agreed on oil supply in return for credits. Back in 2004, Rosneft received a $6 billion loan from the Chinese to assist with its purchase of Yuganskneftegaz in exchange for a commitment to deliver 48.4 million tons of oil during the period 2005-2010. In that deal, the price of the oil was tied to Brent less a certain discount. This time a different formula will be applied to better take into account specifics of the Asia market, including the quality of oil that will be required. The overall value of the 300 million tons of oil under the contract signed yesterday is estimated to be $90 billion at current prices.
The Moscow Times believes that Rosneft will use part of the $15 billion it is receiving on loan from China to launch its huge Vankor field in Eastern Siberia later this year. For its part, Transneft will use its share of the Chinese credits, $10 billion, to complete construction of Russia’s first pipeline across its Asian territory to the Pacific coast. This line has a 600,000 barrels-per-day capacity. Until now that capacity was wholly directed to the Pacific. Now half will be diverted to China via a 67-km pipeline spur to the border that Transneft will build at a cost Vedomosti estimates to be $200-$400 million. A further 960 km of pipeline will have to be built within China, most likely by the Chinese themselves, at a cost of $3-4 billion.
Vedomosti tells us that the $25 billion that the Chinese are now extending to Russia as credits should cover about one-quarter of the country’s $100 billion negative balance of payments in 2009, taking into account the capital and interest on existing international loans scheduled to be repaid this year.
The deal with China over loans for long term oil delivery and the start-up of the LNG exports from Sakhalin are key elements in Moscow’s plans to raise significatly the share of its energy exports going to the Asia-Pacific region. According to Kommersant, current goals are 27% with respect to natural gas exports and 24% with respect to oil. Diversification of business partners is obviously no less topical an issue for energy suppliers today than it is for consuming countries
© Gilbert Doctorow 2009-2010
G. Doctorow is an occasional guest lecturer at St. Petersburg State University. His latest book Stepping Out of Line: Collected (Nonconformist) Essays on Russian-American Relations, 2008-12 is scheduled for publication in April 2013 and will be available from Amazon in paperback and e-book editions.