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The Yomiuri Shimbun (Japan): Sakhalin-2 deal sells Mitsubishi, Mitsui short: ‘Mitsui, Mitsubishi and Royal Dutch Shell were all betrayed…’

Hiroshi Ikematsuand Tamaki Aikyo Yomiuri Shimbun Staff Writers
(Saturday Dec. 23, 2006)

Mitsui & Co. and Mitsubishi Corp. have bowed to pressure from the Russian government by agreeing to hand over control of the Sakhalin-2 project to Russia’s state-owned gas monopoly Gazprom.

Mitsui and Mitsubishi, along with the Royal Dutch Shell group, sought an early conclusion to the negotiations by holding a summit meeting of company heads in Moscow on Thursday, less than a week after the last meeting.

Gazprom reportedly agreed to pay about half of what the Japanese trading firms and Royal Dutch Shell have invested in the project, which amounts to about 16 billion dollars, in return for the majority stake of the joint venture Sakhalin Energy Investment Co.

A senior official of one of the parties involved said the Japanese companies will be able to retrieve the capital they have invested in the project.

But in fact, the deal does not reflect the current value of the project, that must be much higher now than it was when the project began in the 1990s, as the price of oil has about tripled since then.

“The acquisition price for Gazprom is much cheaper than the current value of the project, so the truth is that the three companies, in effect, made a large concession to the Russians,” another official involved in the project said.

The only reason the three companies accepted the accord on disadvantageous terms, after completing 80 percent of the project by themselves, is because the project would have fallen significantly behind schedule if they did not reach an agreement before the year’s end.

Construction work is only possible in winter when the ground is frozen in some parts of the project sites on marshlands.

The three companies would not be able to start exporting liquefied natural gas to Japan by 2008, as planned, if they failed to complete construction work this winter.

The three companies were trapped in a corner, because failure to start exporting the gas on schedule would mean they would have to provide customers in Japan with alternative fuel from somewhere else.

“Coming up with a large amount of fuel as a substitute would become a huge burden on our financial status,” a trading firm official said.

With the negotiations on the control of the project over, optimism is growing among domestic energy providers, including Tokyo Electric Power Co. and Tokyo Gas Co., which plan to import LNG from Sakhalin-2.

“We are sure the Russians won’t do anything that undermines their business chances,” an official said.

However, the deal to give control of the project to Gazprom has undeniably damaged trust between Japanese and Russian officials, and the agreement may not be the end of problems.

Mitsui, Mitsubishi and Royal Dutch Shell were all betrayed when Russian President Vladimir Putin’s administration, which has been escalating its nationalistic stance on energy resources, demanded a majority stake in Sakhalin Energy Investment in November, citing environmental issues.

The three companies at the time were nearing a deal with Gazprom in negotiations that started in October to invite the Russian monopoly into the project as a 27.5 percent shareholder.

A Tokyo Gas executive said, “There are some uncertainties about whether Russia will abide by the trade contract over a long period.”

Out of distrust of Russian policy makers, domestic energy providers are starting to look for other ways to obtain LNG, just to be prepared if the supply from Sakhalin-2 concessions is interrupted.

Some foresee even more maneuvering from Russia. “Russians may now demand more control on Sakhalin-1,” an energy industry observer said.

Sakhalin-1 is another joint-venture LNG development project in which Russian state-owned oil firm Rosneft holds a 20 percent stake.

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