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Financial Times: Sakhalin-2 casts cloud over Japan energy strategy

By David Pilling in Tokyo and Arkady Ostrovsky in Moscow: Published: September 22 2006 03:00 | Last updated: September 22 2006 03:00

Russia’s withdrawal of a permit for the $20bn Sakhalin-2 liquefied natural gas project could be a “massive blow” to Tokyo’s plans to secure a strategic energy partnership with Russia, a senior Japanese official said.

The official, who did not want to be identified, said: “If this contract is eventually cancelled, it will demonstrate how vulnerable LNG contracts are to the geopolitical intentions of host nations.”

Japan’s electricity utilities have signed contracts with the Shell-led project in Russia’s far east to deliver natural gas equal to about 10 per cent of Japan’s total needs. Mitsui and Mitsubishi, two of Japan’s largest trading companies, own 25 and 20 per cent of the project respectively.

Shinzo Abe, a conservative who will be sworn in as prime minister next Tuesday, was quick to criticise Moscow after the natural resources ministry cancelled the environmental permit. Monday’s decision has to be ratified by the industrial safety agency before taking effect.

Officials and analysts said the revocation of the permit could be as damaging to faith in Russia’s rule of law as the affair over Yukos – whose chief executive, Mikhail Khodorkovsky, was jailed as the oil company’s assets were seized by the state. However, they said Moscow might be willing to negotiate and that Japanese trading companies could, as a compromise, end up transferring part of their equity stake to state-owned Gazprom.

Kuninori Matsuda, director of the Russian division of Japan’s foreign ministry, said: “The use of the word cancellation is not correct. It is too early to determine the fate of the whole project.” Mr Matsuda urged all sides to come to the negotiating table, saying he was encouraged by comments from Alexander Losyukov, Russia’s ambassador to Tokyo, that Moscow wanted Sakhalin-2 to go ahead.

The dispute comes at a difficult time for Russo-Japanese relations, soured by a long-running dispute over islands known as the Southern Kuriles in Russia and the Northern Territories in Japan, occupied by Russia in the closing days of the second world war. Ties took a turn for the worse last month when Russian border guards killed a Japanese fisherman poaching in Russian waters. Yesterday a Russian court ordered the skipper of the fishing boat to pay Rbs500,000 ($18,5000, €14,700, £10,000) in damages.

Separately, an official at the natural resources ministry told Reuters that Russia would forbid a reported rise in the cost of the Sakhalin-1 project led by Exxon Mobil. Sergei Fedorov, head of geological and subsoil use policies, said the ministry had been told that Exxon’s costs could rise to $17bn from an initial $12.8bn. However, a ministry spokesman told the FT Mr Fedorov had expressed a personal opinion and that the ministry “unfortunately” had no jurisdiction over the project’s rising costs.

The ministry will today examine whether TNK-BP, the Anglo-Russian company, had met the terms of its licence to develop the massive Kovykta gas field in Siberia, in response to a local prosecutor’s demand, reported by the FT, that the licence be suspended.

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