MITSUI VIEWS POSITIVELY THE TRANSFER OF SAKHALIN 2

C O N F I D E N T I A L TOKYO 007111

SIPDIS

SIPDIS

DEPT. PLEASE PASS TO

E.O. 12958: DECL: 12/21/2016
TAGS: PGOV PREL ENRG ECON JA RU
SUBJECT: MITSUI VIEWS POSITIVELY THE TRANSFER OF SAKHALIN 2
CONTROL TO GAZPROM

REF: A. TOKYO 6163


B. TOKYO 6578

Classified By: Joseph R. Donovan for reasons 1.4 (b,d).


1. (SBU) Mitsui & Co., one of two Japanese shareholders in
Russia's problem-plagued Sakhalin 2 project, continues to
insist that the now concluded deal to transfer a majority
share in the project to Russia's Gazprom is a positive move
(reftels). Mitsui & Co. Energy Business Unit's Planning
Department General Manager Ken Yamaguchi told Econoff that
Mitsui & Co. has all along welcomed the addition of a Russian
company into the project. He said that the inclusion of
Gazprom brings stability to the project and added that it is
normal for projects such as Sakhalin 2 to include a local
company. Yamaguchi also declared that Mitsui & Co. is
confident the contracts already signed by Japanese utility
companies for purchase of almost 60 percent of the project's
liquefied natural gas (LNG) will be honored by Gazprom. He
confirmed Japanese media reports that the agreement handing
Russia's Gazprom a majority share in Sakhalin 2 requires
Shell to transfer 30 percent of its stake to Gazprom while
Mitsui and Mitsubishi will each transfer 10 percent; an
additional one share will be included to give Gazprom a total
of just over 50 percent.


2. (SBU) Ministry of Economy, Trade and Industry Agency for
Natural Resources and Energy's Petroleum and Natural Gas
Division Director Shin Hosaka told Econoff that the GOJ was
not 100 percent satisfied with the agreement but because
Mitsui & Co. and Mitsubishi had accepted and signed it, the
GOJ would also accept it. The major GOJ concern is that
existing contracts with Japanese utility companies for LNG
delivery be honored. The contract signed with Gazprom
includes language guaranteeing that they will be. Hosaka
said he will continue to closely monitor the agreement to
ensure that the promise is kept.


3. (C) Comment: Despite concerns that Russia engaged in
strong-arm tactics to secure this majority stake in Sakhalin
2, Mitsui & Co. seems willing to look at the bright side.
The company has not wavered in its position that Gazprom's
participation will be a good thing overall. More important
to Mitsui & Co. than the size of its share in Sakhalin 2 is
that the project honor the already signed contracts with
Japanese utilities to purchase the project's natural gas, a
condition which at this point appears likely. The inclusion
of Gazprom also probably indicates that many of the project's
current problems, especially the pursuit of environmental
violations, may quietly go away. In addition, Mitsui has
substantially reduced its risk in a project whose costs have
more than doubled. Finally, if press reporting is accurate,
then the framework for the production-sharing agreement (PSA)
-- which gives foreign investors preferential treatment --
will remain in place. We will continue to follow and report
on this issue.
DONOVAN