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The Australian: Sakhalin row risk to energy alliance

David Pilling, Tokyo
Saturday September 23, 2006

RUSSIA’S withdrawal of a permit for the $US20 billion ($26billion) 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.

But they said Moscow might negotiate and that Japanese trading companies could, as a compromise, transfer 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 World War II.

Ties took a turn for the worse last month when Russian border guards killed a Japanese fisherman poaching in Russian waters.

A Russian court on Thursday ordered the skipper of the fishing boat to pay Rbs500,000 ($25,000) in damages.

The difficult relations could make Tokyo rethink its strategy of relying on Russia in its efforts to reduce dependence on Middle Eastern oil.

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 ExxonMobil.

Sergei Fedorov, head of geological and subsoil use policies, said the ministry had been told that Exxon’s costs could rise to $US17 billion from an initial $US12.8 billion.

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.

Additional reporting:

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