SAKHALIN 2 PARTNER CONFIDENT PROJECT WILL NOT BE

UNCLAS SECTION 01 OF 02 TOKYO 006163 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ECON ENRG PREL JA RU SUBJECT: SAKHALIN 2 PARTNER CONFIDENT PROJECT WILL NOT BE CANCELED ¶1. (SBU) Summary. Former Japanese Ambassador to Russia Takehiro Togo, currently senior counselor at Mitsui and Co., which is part of the Sakhalin 2 consortium, told Econoff on October 17 that the Russian government had no desire to pull the plug on the Sakhalin 2 project despite environmental concerns surrounding it. The Russian government was currently pursuing a number of natural resource investigations, not just Sakhalin 2. Togo suggested that talks between Royal Dutch Shell and Russian oil major Gazprom over swapping shares in different projects were not going well and that may have played a role. He strongly suggested that the inclusion of Gazprom in the consortium would benefit all concerned while noting Russian government concern over the ballooning cost of the project. Togo also highlighted the mutually beneficial relationship of Russia and Japan in the energy field. End Summary. ¶2. (SBU) Former Japanese Ambassador to Russia (1996-99) Takehiro Togo, now serving as a senior counselor at Mitsui and Co., told Econoff on October 17 that Russia has no interest in seeing the Sakhalin 2 project canceled over environmental concerns. He suggested that Sakhalin 2 had not been singled out; Russian President Vladimir Putin recently ordered a range of investigations into Russia's natural resources because of environmental concerns and around 200 licenses have been canceled in the last few months, including those for oil and natural gas projects as well as for mining facilities. In part, this was due to the rising criticism of the way the licenses were issued, according to Togo. In the case of Sakhalin 2, the Russians were claiming that 50 percent of the environmental agreement had not been observed by the consortium. Togo also noted that normally environmental issues were addressed after a project had been completed, for example, replacing trees that had been removed. ¶3. (SBU) Togo told Econoff that in addition to environmental concerns, political pressure had contributed to the cancellation of the Sakhalin 2 environmental license. Royal Dutch Shell and Russia's Gazprom have been negotiating to swap shares in projects which would bring Gazprom into the Sakhalin 2 consortium (currently Shell holds 55 percent, Mitsui and Co. 25 percent and Mitsubishi 20 percent) and those negotiations have not been going well. Togo said there were two concerns: the calculation of Sakhalin 2's costs and the environmental issues. Togo told Econoff that it was highly unusual for costs of such projects to double in size as they reportedly have with Sakhalin 2. Far more common is for costs to increase by 20 or 30 percent. Togo repeated several times that including Gazprom in the consortium would be of great benefit to all. He also emphasized that canceling the project would be far too costly to everyone because the first phase of the project, which is expected to produce 9.6 million square meters of natural gas, is about 80 percent completed. ¶4. (SBU) Gazprom's Chairman of the Board Dmitry Medvedev, who is also First Deputy Prime Minister of the Russian Federation, recently visited Mitsui and Co. to indicate Gazprom's deep interest in joining the project. He wanted to talk directly with Mitsui and Mitsubishi mainly because of their relationship with Japanese consumers. Medvedev questioned Togo about the lack of active Japanese participation in the project and Togo explained that Japanese companies have little experience in exploration but wish to protect shareholder interests. (Comment: Currently Japanese gas companies have contracted to buy more than half of Sakhalin 2's natural gas supply. End comment.) Togo acknowledged to Econoff that more talks were necessary between Japanese companies and Gazprom. ¶5. (SBU) Togo noted that this was the first time Japanese energy consumers had shown interest in Russia as a supplier and that Russia was a very convenient source of natural resources. This was also the first time that Russia had realized the value of liquefied natural gas (LNG) because it could reach the consumer without need of a pipeline, which helped Russia diversify its consumer base. ¶6. (SBU) Comment: Togo is uniquely placed to understand Russian strategic thinking and Japan,s oil consumers. Given his long relationship with the Russian government and his work with Mitsui, he is more likely to put a positive spin on the problems involving the Sakhalin 2 project. TOKYO 00006163 002 OF 002 ¶7. (SBU) Bio Note: Togo served as a diplomat in Washington during 1979-81, and served in the Japanese Embassy in Russia four times under Khrushchev, Brezhnev, Gorbachev, and Putin. He was planning to participate in the 50th anniversary celebration of the Japan-Soviet Joint Declaration (October 19, 1956) in Moscow this week. SCHIEFFER