RUSSIA OIL SEMINAR REVEALS DIFFERING VIEWS ON

C O N F I D E N T I A L SECTION 01 OF 03 TOKYO 006785 SIPDIS SIPDIS DEPT PLEASE PASS TO EB/ESC/IEC/ENR:PHAYMOND, EB/ESC/IEC:SGALLOGLY, EB/ESC/IEC/ENRB:JWECKER, EB/ESC:JEIGHMIE, INR BGOLDBERG. NSC PLEASE PASS TO KTONG, JSHRIER DOE PLEASE PASS TO DOE/PI: DPUMPHREY, JNAKANO E.O. 12958: DECL: 11/28/2016 TAGS: PREL PGOV ENRG JA RU SUBJECT: RUSSIA OIL SEMINAR REVEALS DIFFERING VIEWS ON RUSSIAN ENERGY POLICY Classified By: Ambassador J. Thomas Schieffer for reasons 1/4 (b,d) ¶1. (SBU) Summary. Two Russian guest panelists at a November 9 seminar on Russian energy strategy in Tokyo displayed starkly different views on Moscow's energy policy. An executive of the energy company Rosneft strenuously defended the Russian government and its environmental policies, particularly as they relate to the Russian island Sakhalin. A journalist specializing in energy issues had a more cynical view of Russian motives and was particularly critical of the government,s relationship with Russian gas major Gazprom. A Japanese guest panelist, the chief researcher at Japan Oil, Gas and Metals National Corporation (JOGMEC) said little other than to outline concerns over the Sakhalin 2 project, the one project out of six on Sakhalin Island in which Rosneft has no investment. End summary. Rosneft Business in Eastern Siberia and Russian Far East -------------- -------------- ¶2. (SBU) On November 9 Econoff and Econspec attended the Seventh Annual Russian Energy Strategy Symposium sponsored by Mainichi Shimbun. Guest panelists Rosneft Strategic Overseas Project Bureau Director General Valeri Rusakov and Russian Energy Weekly Analyst and Editor in Chief Mikhail Kroutikhin explained their very different views of the Russian government,s motives in the energy arena. Rusakov began with a discussion of East Siberia and the Russian Far East, calling the areas strategically important for Russian energy major Rosneft. He highlighted the fact that in 2005 oil production had been 420,000 barrels/day but that that was expected to increase to 2.7 million barrels/day by 2015. Rosneft and Sakhalin -------------- ¶3. (SBU) Rusakov relayed that Rosneft is participating in five projects on the island of Sakhalin. In Sakhalin 1, Rosneft holds 20 percent while ExxonMobil has 30 percent, Sakhalin Oil and Gas Company (SODECO, a Japanese consortium) has 30 percent, and an Indian company, Oil and Natural Gas Corporation, has 20 percent. Rosneft has teamed up with the Chinese company SINOPEC in Sakhalin 3 and British Petroleum on Sakhalin 4. (Note: Rosneft is NOT involved in Sakhalin 2, which is under investigation by the Russian government for environmental violations.) ¶4. (SBU) Rusakov pointed out that the ecology of East Siberia and the Russian Far East was very important to him because he grew up on Sakhalin. He argued that Russian interest and concern over environmental issues was real. He admitted, however, that the Russian legal system was still undeveloped and Russian technology was immature but insisted that Russian environmental standards should still match international standards. Ghost of Gazprom -------------- ¶5. (SBU) During Q&A many questions from the audience concerned Russia,s natural gas, forcing Rusakov to point out that natural gas issues were primarily the domain of Russian natural gas company Gazprom, not Rosneft. Rusakov also called for politics to be left out of the discussion of Sakhalin and noted he had heard nothing from authorities about canceling any contracts. Asked about Sakhalin 1 gas buyers, Rusakov reminded the audience that originally the Sakhalin 1 consortium had planned to ship the project,s gas to Hokkaido via pipeline but that Japan has rejected that plan because of its preference for liquefied natural gas (LNG). Rusakov said the consortium was now considering three options: 1) build a pipeline to China, 2) build a facility to convert the gas to LNG for shipment to Japan, or 3) link up with Sakhalin 2 to convert the gas to LNG. (Note: The second and third options are fairly unlikely and possibly were suggested to appease the Japanese audience.) Rusakov also emphasized that Rosneft would like the East Siberian pipeline to go to the Pacific so that its resources could reach TOKYO 00006785 002 OF 003 consumers other than only China. Asked about the incident last December involving the temporary shut-off of the Russian natural gas supply to Ukraine, Rusakov heatedly pointed out that Russia had only done so to force Ukraine to start paying the market price for the gas. Russian Critic -------------- ¶6. (SBU) Kroutikhin played counterpoint to Rusakov,s defence of the Russian government, at one point quoting an American political economist who called the country "a state with an iron fist that adapted democratic elements such as elections." Kroutikhin observed that Russia has no independent judicial branch, no independent capital, and no third-party control over presidential power. He described the system of state authority as akin to a corporation and said that national interests were directly linked to the interests of the Kremlin. Kroutikhin criticized Russia,s energy policy as being directly related to the 2008 presidential election and said that any major oil company,s business decisions were made in consultation with the government. He gave as an example the pipeline project from East Siberia to the Pacific, saying the project had been a nationally strategic decision rather than a business decision. Kroutikhin was highly critical of gas major Gazprom, saying that Russian President Putin acts as a Gazprom representative when he travels overseas. Kroutikhin claimed that the government monopolizes Gazprom,s revenue, allocating less than one quarter of its expenditures to domestic gas exploration, while the rest is invested in foreign companies, used to acquire media companies or used for political campaigning. He also accused Gazprom of pushing its way into projects close to completion by using its political power and thus increasing the State,s revenues. ¶7. (SBU) In Q&A Kroutikhin continued his attack on the Russian government, calling the threatened revocation of Sakhalin 2,s environmental license "justice by choice." He pointed out that most of the project's destructive lumbering occurred near the pipeline but that the Sakhalin Energy consortium was required by regulation to use a local subsidiary for the work. Kroutikhin also noted that the construction of the East Siberian pipeline was behind schedule and expressed doubt that it would extend to the Pacific. He closed by accusing the Russian government of using its energy resources as a political weapon. Sympathetic Japanese View of Russian Government -------------- -- ¶8. (SBU) In his assessment of Sakhalin 2, Japan Oil, Gas and Metals National Corporation (JOGMEC) Chief Researcher Masumi Motomura claimed that the media had confused three different issues. First, the environment had been seriously damaged in the southern part of Sakhalin. Landslides had become a real risk to the pipelines which in turn threatened additional environmental contamination in that region. Secondly, the cost of construction had doubled from $10 billion to $20 billion. Third, Gazprom was attempting to gain a share in the project. Motomura noted that the last two problems had only recently appeared. (Note: On July 6, 2005, Gazprom and Royal Dutch Shell agreed on an oil asset swap deal. Gazprom was to take a 25 percent share of Sakhalin 2 while Shell would receive in return about 50 percent of a west Siberian field, Zapolyarnoye. Only days later Shell announced the cost of the development had doubled. Gazprom became angry that it had not been notified of this before signing the swap deal. The two companies have been in negotiation ever since.) Motomura noted that relevant Russian ministries had clearly stated that the Sakhalin 2 contract could not be altered without the agreement of all parties and he said he thought it very likely that Shell would seek a compromise with Gazprom. Motomura also criticized the media for politically dramatizing the cessation of gas supplies to Ukraine by Moscow last December, saying that the experts saw the TOKYO 00006785 003 OF 003 incident as purely an economic one. Bio Notes: -------------- ¶9. (SBU) Rusakov, 33, is a graduate of the Moscow University of Commerce with a degree in Economics and International Economic Relations. Now an analyst and editor-in-chief of the weekly Russian Energy, Kroutikhin, 59, began his journalism career at Russian media company Tass International and has been a correspondent in Teheran and Cairo. He also served as Cairo's Tass bureau chief. Motomura, 56, has been in his current post as chief researcher at JOGMEG since 2004. He spent time as a researcher at the Oxford Energy Institute during 2001-02. Motomura holds a master,s degree in geology from the University of Tokyo. He began working for Japan National Oil Corporation (JNOC) in 1977. (Note: JNOC, a government institution, was dissolved in 2005. Some of its business was spun off into JOGMEG.) Comment -------------- ¶10. (C) The Russians, especially Rusakov, were unprepared for the Japanese interest in Sakhalin 2, a project with much greater impact on Japan because it will be producing LNG, over half of which already is contracted to go to Japan. Age and occupation likely played a large role in defining the Russians, differing viewpoints on their government. Rusakov was quite passionate in his defense of his native Sakhalin while Kroutikhin clearly has developed a jaundiced eye covering the news over the years. As for Japanese panelist Motomura, he added little to the debate beyond a slightly positive assessment of the Russian government and was more than willing to cede the floor to the Russians most of the time. SCHIEFFER