Asia's Dependence on Russia in Doubt

Sakhalin dispute threatens Russia's Asian market

MOSCOW (AFP)

Russian government pressure on a Shell-led consortium developing vast oil and gas fields in the Pacific Ocean could set back Moscow's hopes of becoming a key energy exporter to Asia, observers have said.

“The possibility that the dispute could delay planned deliveries from the fields to Asia beyond 2008 is "the understatement of the year", said Adam Landes, energy expert at the Moscow-based Renaissance Capital investment bank. "To all extents and purposes the project is paralysed by the decision adopted yesterday. What the investors are facing is re-negotiation or paralysis," Landes said Tuesday.

On Monday, Russia revoked an environmental permit for the Sakhalin-2 project, halting work on natural gas infrastructure that is a key part of Moscow's plans to boost oil and gas exports to energy-hungry Asian markets. The 20-billion-dollar project (15.8-billion-euro) project is the largest foreign investment in Russia and the world's biggest privately funded energy venture. Russian authorities said obtaining a new permit could take six months or more and officials are calling for broader changes to the project's production sharing agreement (PSA) with the government.

Sakhalin Energy, which is 55 percent owned by Dutch-British oil giant Shell and 45 percent by the Japanese firms Mitsui and Mitsubishi, implicitly warned that Russian pressure could damage international links. "We will continue to work with the Russian authorities to resolve the issue and thereby maintain confidence of international customers in Japan, Korea and North America," the company said in a statement on Monday. However, revoking the permit "could be damaging for the project and for Russia and lead to delays in project development," the statement said. Sakhalin Energy, which is building Russia's first liquefied natural gas (LNG) plant off the island of Sakhalin in the Russian Far East, has already signed agreements to sell LNG to Japanese energy companies.

Increasing Russian energy links with Asia has been a key goal for President Vladimir Putin, who earlier this month said the share of oil and gas exports to Asia would rise from the current three percent to 30 percent within 15 years. But analysts say that figure is unrealistic because of a lack of infrastructure for pumping oil and gas to Asia and insufficient development of Russian oil and gas reserves in eastern Siberia. "It would require decisions sooner rather than later," said Stephen O'Sullivan, energy analyst at Deutsche UFG, referring specifically to an as yet undecided route on an oil pipeline planned to run across Siberia. "If you want to increase your market share in Asia... then you've got to realise that this region has other alternatives, like Middle East oil, Middle East LNG, Australian LNG," O'Sullivan said.

The Russian Far East has been seen as a safer and more reliable alternative to Middle East supplies by Japan, which is almost entirely reliant on energy imports and is interested in diversifying supplies as much as possible. But Japanese officials are now worried about Sakhalin, which is believed to hold oil and gas reserves equivalent to those in the North Sea. "The Japanese government is concerned that any delay in major projects of cooperation between Russia and Japan, such as the symbolic Sakhalin-2 project, can have negative effects on Russia-Japan ties in general," Chief Cabinet Secretary Shinzo Abe told reporters on Tuesday.