April 19, 2013 / 8:26 AM / in 5 years

RPT-Russia, Japan edge toward breakthrough in gas supplies

By Antoni Slodkowski and James Topham

TOKYO, April 19 (Reuters) - Russia and Japan are in intense talks on expanding gas-supply agreements ahead of a summit later this month, moving ever closer to a breakthrough that could redraw the East Asia energy map, sources involved in the discussions told Reuters.

The talks between the second largest gas producer and the biggest liquefied natural gas importer could receive official sanction on April 29 when Prime Minister Shinzo Abe visits President Vladimir Putin in Moscow. Any official approval on increasing sales would come at the expense of other LNG suppliers, such as Australia, Qatar and Malaysia.

Russia, soon to face the competitive threat of cheap U.S. shale gas exports, wants to lock down more customers as its monopoly gas exporter Gazprom is being undercut in Europe by LNG imports. It also sees further LNG sales to Asia as a key component to its plan to send East Siberian gas down a pipeline to China -- if it can ever agree on pricing with the nation that is potentially its biggest customer.

“The talks have picked up steam dramatically,” said a senior government official. “I think the rules of the game are about to change big time. Gazprom, which until now has had the monopoly and has been elusive, is getting a move on.”

Japanese trade ministry officials are downplaying expectations for the Abe-Putin meeting. Japan and Russia have been close to expanding oil and gas ties before, only to have a dispute over islands in the North Pacific derail progress.

Gazprom representatives, however, came to Japan last week to market gas from its $38 billion Vladivostok LNG project to Japanese energy buyers, three sources with the knowledge of the matter said. It was their first tour of the Japanese client base for this project and no agreements have been reached.

Gazprom’s CEO Alexei Miller also met with Trade Minister Toshimitsu Motegi in Tokyo on Wednesday, and held talks with Japanese plant constructors interested in the project, Chiyoda Corp and JGC Corp, according to sources with knowledge of the talks.

“Especially after Putin very clearly said that he wants to boost the share of LNG (exports to Asia) many people are coming hell for leather to (convince) Japan,” the government official said.

Gazprom competitor Rosneft, also looking to secure buyers for liquefied gas exports, on Wednesday signed a preliminary agreement on joint oil and gas developments with Marubeni Corp. And other Japanese and Russian industry and government officials wound up meetings this week in Fukui on Japan’s west coast.

“The Russians are under a lot of competitive pressure,” said John McCreery, Asian head of oil and gas at Bain & Co. “The urgency is on the Russian side to make something happen.”

Projects being promoted besides Gazprom’s LNG terminal in the eastern Siberian port of Vladivostok include further developments of oil and gas fields off Sakhalin island and gas projects in Yamal in northern Russia.

The Fukushima nuclear crisis of 2011 spurred Japan’s energy companies to scour the world for supplies. The country now consumes a third of global LNG shipments, which helped to push it to a record trade deficit in January.

Russian gas lies on Japan’s doorstep and already makes up about 10 percent of its LNG imports. In 2012, Russia was the fourth largest supplier of LNG to Japan, behind Australia, Qatar and Malaysia.


As the Fukushima crisis was unfolding two years ago, Putin invited the CEOs of Mitsubishi Corp and Mitsui & Co to Sakhalin to discuss closer cooperation on energy ties, according to sources directly involved in the discussions.

The offer was rebuffed due to the sensitivity of the situation, the sources said. But those early contacts and other offers of support as Japan grappled with energy shortages, may come to fruition when Abe meets Putin in Moscow at the end of the month, the first summit between the countries in 10 years.

“Energy talks between Tokyo and Moscow have been going on since the 1970s, but this time they’re for real,” said Nobuo Tanaka, former head of the International Energy Agency and a senior adviser at a government-affiliated research centre.

First, though, Putin and Russia will have to decide whether to make an exception to Gazprom’s exclusive gas export rights, to give Rosneft and Novatek, which has plans for extracting gas from the peninsula of Yamal in northern Russia, a chance at exports.

Rosneft, despite the agreement signed with Marubeni and a proposal to build a $15 billion LNG plant at Sakhalin-1 north of Japan with Exxon Mobil Corp, has no rights to export gas.

Russia now ships gas to Japan from its only LNG terminal, Sakhalin-2, where Mitsubishi and Mitsui are junior partners with Gazprom and Royal Dutch Shell.

The Japanese partners have been pressing for an expansion there and the existing terminal does present the cheapest, quickest way to increase Russian LNG sales. That and a Vladivostok project built on pipeline sales of East Siberian gas to China and LNG shipments to Japan, may be enough to give Gazprom an edge in the efforts to open a new LNG front in the Russian Far East.

Still weighing on many minds are Japan’s claims on islands that Russia seized at the end of the Second World War. The issue has previously disrupted improving commercial relations, but the Abe administration is keen to resolve the dispute, and some Japanese officials are considering pairing further economic cooperation with a deal on the contested islands.

“If we think about the islands and energy as a package, as a broader deal it’s a completely different calculation,” said a senior government official.

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