MITSUI & CO. CONFIDENT RUSSIA WILL ALLOW SAKHALIN

UNCLAS SECTION 01 OF 02 TOKYO 006578 SIPDIS SENSITIVE SIPDIS DEPT. PLEASE PASS TO INR:BEN GOLDBERG, E/B:JWECKER, JEIGHMIE. NSC PLEASE PASS TO JSHRIER, KTONG; DOE PLEASE PASS TO DOE/PI: DPUMPHREY, JNAKANO. E.O. 12958: N/A TAGS: ENRG PREL PGOV JA SUBJECT: MITSUI & CO. CONFIDENT RUSSIA WILL ALLOW SAKHALIN 2 TO CONTINUE ¶1. (SBU) Summary. On October 27 Econoff met with Mitsui & Co. General Manager of Planning Ken Yamaguchi and General Manager of Sakhalin Development Toru Matsui to discuss Mitsui and Co.,s investments in the Russian Sakhalin 2 oil and gas project. (Note: Sakhalin 2 is owned by Sakhalin Energy, a consortium consisting of Royal Dutch Shell, which holds a 55 percent stake, Mitsui & Co. with 25 percent; and Mitsubishi Corp. with 20 percent. Sakhalin 1's primary shareholder is ExxonMobil.) Matsui emphasized his belief that the Russian Ministry of Natural Resources and Energy has no intention of nullifying the Sakhalin 2 project over environmental violations. He identified the real issues as the huge cost overruns of the project and Russian gas major Gazprom,s desire to become part of the project. Matsui also commented that the term "energy nationalism" did not apply to Japan, adding that the Japanese government has very little influence in Japan's energy market. End summary. The Sakhalin 2 Problem - Mitsui's Perspective -------------- -------------- ¶2. (SBU) On October 27, Econoff met with Mitsui & Co. General Manager of Planning Ken Yamaguchi and General Manager of Sakhalin Development Toru Matsui to discuss Mitsui and Co.,s investments in the Russian Sakhalin 2 oil and gas project. (Note: Sakhalin 2 is owned by Sakhalin Energy, a consortium consisting of Royal Dutch Shell, which holds a 55 percent stake, Mitsui & Co. with 25 percent; and Mitsubishi Corp. with 20 percent. Sakhalin 1's primary shareholder is ExxonMobil.) According to Matsui, the Russian Ministry of Natural Resources and Energy has no intention of nullifying the project and noted that this was supported by the Ministry,s October 25 statement to that effect. Yamaguchi claimed that the environmental violations were not substantial, certainly not significant enough to stop the project. The real issues, said Matsui, were the cost overruns--the price has ballooned from $9 billion to $21 billion--and the desire to have Russian gas major Gazprom participate in the project. ¶3. (SBU) Sakhalin Energy has already submitted a revised budget to the Ministry in response to concerns over the cost overruns and is awaiting a response, according to Matsui. As for Gazprom,s participation, he said that any and all investors are welcome and that Gazprom and Shell are currently negotiating terms for Gazprom to join the consortium. Asked about press reports claiming Mitsui & Co. and Mitsubishi Corporation were considering selling some of their shares to Gazprom, Matsui admitted it was possible but that nothing had been decided yet. Sakhalin 2 Progress -------------- ¶4. (SBU) Matsui clarified the status of Sakhalin 2 by explaining that Phase 1 of the project has been completed but that it only includes oil production and then only during the summer months when ships are able to reach the port of Nakhodka at the southern tip of Sakhalin. Phase 2, on the other hand, will provide annual production of natural gas as well as oil and is about 80 percent complete. The remaining 20 percent includes completion of an off-shore facility and an 800-kilometer pipeline to carry the oil and natural gas south. Phase 2,s oil production is expected to begin at the end of 2007 and gas production should start in 2008. About Mitsui & Co -------------- ¶5. (SBU) Yamaguchi noted that Mitsui & Co.,s energy business operations cover everything from the exploration of oil and gas fields to the retail sale of gasoline. In addition to Russia, the company has interests in the Middle East, Southeast Asia, Australia, New Zealand, and the Gulf of Mexico. Mitsui works closely with its Japanese clients--mainly utility companies--to secure long-term natural gas contracts and Japanese utility companies have purchased over 50 percent of Sakhalin 2,s projected natural gas output. (Note: Oil requires no long-term contracts and is simply placed on the world market.) Yamaguchi also noted that Mitsui & Co. sometimes uses the government institution TOKYO 00006578 002 OF 002 Japan Bank for International Cooperation (JBIC) to finance its operations but explained that companies receiving JBIC funding must meet certain conditions and that negotiations frequently are prolonged, which makes this sort of financing less than ideal. Japan's Natural Gas Infrastructure -------------- ¶6. (SBU) Yamaguchi reminded Econoff that Japan is the largest liquefied natural gas (LNG) consumer in the world and therefore must make large, long-term investments. For geographical reasons, Japan has never built a national gas pipeline infrastructure. Instead, utility companies have carved up the country among themselves and built terminals in nearby ports to re-convert imported LNG to its gaseous state. The utility companies, consumers tend to be located nearby, eliminating the need for an extensive pipeline network. Energy Nationalism and GOJ Influence -------------- -------------- ¶7. (SBU) Asked about energy nationalism, Yamaguchi admitted the term was being applied to some oil-producing countries but said he thought the term did not apply to Japan. He observed that every government has the responsibility to secure energy for its citizens but that this was not energy nationalism. He added that the GOJ has less influence over Japan,s energy industry and energy market than ExxonMobil has. Comment -------------- ¶8. (SBU) Matsui and Yamaguchi appeared very knowledgeable about the Sakhalin 2 project. Mitsui & Co. has a vested interest in seeing this project through, not only because it owns 25 percent but also because the company has secured many of the long-term gas contracts with Japanese utilities. Matsui,s final comment on energy nationalism and the GOJ,s lack of influence in the energy arena was especially notable given recent government efforts to devise a national energy plan to decrease Japan,s dependency on oil and increase its use of natural gas. Japanese energy companies--or at least this one--appear more likely to conduct business from a corporate viewpoint than a national one. DONOVAN