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Bloomberg: Russian Gas Project Annulment May Hurt Japan Ties, Abe Says

By Megumi Yamanaka and Shigeru Sato

Sept. 19 (Bloomberg) — Russia’s decision to cancel approval for the $20 billion Sakhalin-2 natural gas project, earmarked to supply Japan, may hurt relations between the countries, Japan’s Chief Cabinet Secretary Shinzo Abe said.

“I’m concerned that any major delay in the project, which is a symbol of the cooperation between Japan and Russia, may hurt the overall relationship between the two countries,” Abe, the most likely candidate to succeed Junichiro Koizumi as prime minister, said today at a regular news conference in Tokyo.

Tokyo Electric Power Co. is among Japanese utilities that signed up for almost half of Sakhalin-2’s supply. That’s equal to 8 percent of imports to Asia’s biggest economy, which is looking to Russia to reduce reliance on Middle East energy. Mitsubishi Corp. and Mitsui & Co. own 45 percent of the project, which is 80 percent complete and scheduled to start up in 2008.

“The government is looking closely at developments on the Sakhalin-2 project from the security of energy supply point of view,” Japanese Trade Minister Toshihiro Nikai said separately today. “The Japanese government will continue holding talks with Russia on this.” Nikai said he will meet Russia’s ambassador to Tokyo today.

State-run OAO Gazprom is seeking a stake in the Shell-led venture, the biggest foreign investment in Russia, and threats to shut it down may strengthen its negotiating position, Deutsche Securities Inc. analyst Masanori Maruo said in a report today. Russian President Vladimir Putin built up Gazprom and OAO Rosneft with assets seized from OAO Yukos Oil Co. and is using them to assert the nation’s importance as an energy supplier.

Russia’s Decision

“According to Tokyo Gas, project leader Shell plans to accept Russia’s decision,” Maruo said, without explaining how he obtained the information from Tokyo Gas. “While construction could be delayed somewhat, the LNG supply will be mostly unaffected.”

Tokyo Gas Corp. is among the Japanese utilities that have agreed to buy a combined total of about 4.5 million tons of LNG a year from Sakhalin-2, which will be the closest LNG project to Japan, which currently imports gas from countries including Indonesia and Australia. The venture plans to produce 9.6 million tons a year.

Russia’s Natural Resources Ministry asked the Russian agency responsible for authorizing oil and gas development to annul Shell’s license, the ministry said in a statement yesterday. Sakhalin Energy may wait more than six months for a decision on a new license application, Russian Natural Resources Minister Yuri Trutnev’s spokesman, Rinat Gizatulin, said by phone yesterday.

Shares Drop

Shares of Mitsubishi, Japan’s biggest trading company, fell as much as 2.8 percent, or 60 yen, to 2,125 on the Tokyo Stock Exchange and traded at 2,140 yen at 12:49 p.m. of morning close today. Mitsui, the nation’s No. 2 trading company, fell as much as 4.1 percent, or 63 yen, to 1,479 yen and last traded at 1,481.

Mitsubishi holds 20 percent and Mitsui 25 percent of Sakhalin Energy, the project operator. Royal Dutch Shell Plc owns the rest.

“It’s all part of the bargaining for assets up for grabs in Sakhalin-2,” Craig Pennington, global leader of energy research at Schroders Plc in London, said yesterday. “It’s symptomatic of the Russian industry to take control of key assets at as low a cost as possible.”

Mitsubishi asked Sakhalin Energy to ensure punctual delivery of liquefied natural gas, an official said, asking not to be identified in keeping with company policy. The project is scheduled to start LNG deliveries in 2008, according to Shell.

To contact the reporter on this story: Megumi Yamanaka in Tokyo at [email protected] ; Shigeru Sato in Tokyo at [email protected] .

Last Updated: September 19, 2006 00:01 EDT
 

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