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Viewing cable 06TOKYO71, SAKHALIN I PROJECT PROCEEDING BUT LACKS BUYERS

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Reference ID Created Released Classification Origin
06TOKYO71 2006-01-06 07:49 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Tokyo
VZCZCXRO4055
RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #0071/01 0060749
ZNR UUUUU ZZH
R 060749Z JAN 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 7096
INFO RUEHBJ/AMEMBASSY BEIJING 9831
RUEHMO/AMEMBASSY MOSCOW 0808
RUEHUL/AMEMBASSY SEOUL 6019
RUEHFK/AMCONSUL FUKUOKA 3871
RUEHNAG/AMCONSUL NAGOYA 4011
RUEHNH/AMCONSUL NAHA 6541
RUEHOK/AMCONSUL OSAKA KOBE 6900
RUEHKSO/AMCONSUL SAPPORO 5093
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
UNCLAS SECTION 01 OF 02 TOKYO 000071 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
PLEASE PASS TO USTR - MICHAEL BEEMAN 
 
E.O. 12958: N/A 
TAGS: ECON ENRG JA
SUBJECT: SAKHALIN I PROJECT PROCEEDING BUT LACKS BUYERS 
 
 
1) (SBU) A senior businessman from ExxonMobil reported that 
the Sakhalin I project was going well but that Japanese gas 
and electric companies remain uninterested in purchasing gas 
via pipeline, preferring instead to receive it in the form of 
liquid natural gas (LNG) via ship .  As a result Exxon has 
turned its sights on China for buyers but has thus far not 
reached a deal.  The businessman dismissed press speculation 
that Exxon would turn to Shell and Sakhalin II to liquefy the 
gas produced at Sakhalin I.  He also noted the growing 
importance of Russia versus the South China Sea and added 
that the Russian central government had little influence on 
Sakhalin.  END SUMMARY 
 
2) In mid-January EMIN met with a senior businessman from 
ExxonMobil to discuss the ongoing Sakhalin I project off the 
eastern coast of Russia, of which ExxonMobil owns 30%. 
Russia's Rosneft originally owned 40% of the project but has 
since sold 20% to Oil and Natural Gas Corporation (ONGC) 
India as a "carry", i.e. Rosneft loaned ONGC the money to 
make the purchase and is being paid back from profits on the 
deal, a fairly common arrangement in the oil and gas 
business.  The Sakhalin Oil and Gas Company (SODECO), a 
Japanese consortium comprised of Itochu, Marubeni and Japan 
Petroleum and Exploration Company (JAPEX), owns the other 
50%.  The businessman further explained that SODECO had been 
50% owned by the Japan National Oil Corporation (JNOC), but 
after JNOC was dissolved in 2005, its portion was taken over 
and is managed by the Ministry for Economy, Trade and 
Industry (METI). 
 
3) Due to its expertise, ExxonMobil is the Sakhalin project 
operator, but it shares the project risk among its partners 
who meet regularly to make decisions.  Over the last three 
years the group has invested $6 billion in the first phase of 
Sakhalin I, which by the end of 2005 was expected to produce 
50,000 barrels of oil per day and 2 million cubic feet of gas 
-- not huge but not insignificant either.  The project 
expects to pump 250 billion barrels of oil in 2006, 
eventually rising to 400 billion.  Gas production should 
double to 4 million cubic feet. 
 
4) The sea off the northern coast of Sakhalin is under ice 
six months of the year.  To allow the complex to operate 
24/7/365, ExxonMobil has totally enclosed it to the tune of 
$40 million.  By comparison, Shell operates Sakhalin II only 
six months of the year.  The businessman also noted that 
salaries are comparatively high for the expatriates and the 
local hires. 
 
5) Sakhalin's Phase II will cost approximately $5-6 billion 
to complete, bringing the total cost of the overall project 
to $10-12 billion.   It primarily focuses on natural gas 
production which ExxonMobil wants to market to Japan.  The 
company is looking to build a 2400 kilometer (1800 miles) 
pipeline from Sakhalin to Tokyo Bay to bring the gas to 
Japan.  The pipe would run from Sakhalin to Hokkaido, through 
Sapporo, then back offshore to the Pacific coast, down to 
Sendai and on to Tokyo.  The technology already exists for 
such an endeavor and the businessman emphasized that neither 
the pipeline length nor the cost was unreasonable.  He 
dismissed press speculation that ExxonMobil would be forced 
to turn to Shell's Sakhalin II project to liquefy the gas and 
ship the LNG to Japan.  However, no Japanese company has 
signed a contract with the company yet to receive gas via the 
pipeline so Exxon has not begun building it. 
6) Due to the lack of Japanese interest, the company is now 
negotiating with Chinese buyers.  The China National 
Petroleum Corporation (CNPC) signed a letter of intent in 
October 2004 to have ExxonMobil build a pipeline to the 
Russian border.  This pipeline would run along existing roads 
and rights-of-way in Russia, according to the businessman. 
China would buy the gas at the border and then take 
responsibility for getting it to Harbin and beyond.  All of 
the negotiations are complete except for price.  The 
businessman said ExxonMobil was prepared to walk away from 
the deal if they could not agree an appropriate price.  He 
thought the Chinese failed to understand this because few 
Western companies had walked away from deals with China thus 
far. 
 
 
TOKYO 00000071  002 OF 002 
 
 
7) The businessman bemoaned the fact that Japan had done away 
with domestic energy market regulators but had left the 
energy monopsonies in place, which continued to defy the 
government's efforts to diversify Japanese energy imports. 
Japan's LNG terminals are wholly owned by the companies but a 
pipeline is by law an open access vehicle.  Once the pipeline 
is built it cannot be moved and it belongs to the country 
that builds it -- something he believed the GOJ understood 
but Japanese energy companies did not.  The businessman 
argued that the government should create separate companies 
to own and operate the LNG terminals. The GOJ had funded the 
Sakhalin feasibility studies at a cost of several hundred 
million dollars and now private industry stood in the way of 
it seeing any return on that investment in the form of 
Japanese energy imports from Sakhalin. 
 
8) The businessman noted that METI should concentrate less on 
South China Sea deposits and more on Russia where there were 
far greater resources.  He estimated that the East China Sea 
probably had only one-tenth the resources available in 
Sakhalin.  He added that ExxonMobil is largely immune to the 
machinations of the Russian government. 
 
 
DONOVAN