Russia and Japan are planning joint economic projects as a way to break new ground in their political relations. Some of them concern the gas extracted on Sakhalin. The Japanese have no gas of their own, so, the Sakhalin project is a good way for them to get more gas, while for the Russians this is a chance to outrun the Americans and the Australians on the LNG market.
At a business forum in Tokyo, Chief Operating Officer at Mitsui & Co Hirotatsu Fujiwara said that developing LNG market in the Asia-Pacific would boost rivalry with Australia and the United States. He noted that the Sakhalin-2 project might help Russia to win that rivalry.
Today, Sakhalin-1 and Sakhalin-2 are supplying 10mn-11mn tons of LNG a year, with Japan receiving 80% of the gas. The fields of the Sakhalin-3 project will help the Russians to enlarge their supplies to 5mn-5.5mn tons.
According to the Oxford Institute for Energy Studies, in 2015, Asia consumed 174.9mn tons of LNG, including 84.1mn tons consumed by Japan. So, Sakhalin’s gas will make no difference.
“The most Russia can get in Japan is 15% of its market. By saying to win the rivalry, we mean not to gain a monopoly but to sell all the gas,” says Alexey Grivach, Deputy Director General of the National Energy Security Foundation.
The advantages of the Sakhalin project, according to the expert, are financial clarity, accessible resources and existing infrastructure. On the other hand, gas demand in Japan can go either up or down. According to the Oxford Institute for Energy Studies, by 2025, in the best-case scenario, LNG consumption in Japan may grow by 6.6mn tons, while, at worst, it may drop by 21.5mn tons.
Even more, now that gas prices are low and there is lots of LNG on the market, the Japanese are considering replacing their long-term contracts with short-term spot deals as, according to Reuters, in Nov 2016, gas on the spot market was 30% cheaper.
“As far as prime and transportation costs are concerned, Sakhalin’s LNG is head and shoulders above the Australian and U.S. LNG. But the Sakhalin projects are commercial and their investors seek to earn money rather than just get their money back. Besides, such projects need long-term contracts as a guarantee of stable gas demand,” Grivach says.
Under Sakhalin-2, the sides have more chances to come to terms on the price and the volumes as both Mitsui & Co and Mitsubishi are parties to this project. According to CEO of Gazprom Alexey Miller, the companies are acting as strategic partners and are considering options for exchanging their assets.
One more peculiarity of this partnership is that among the joint projects is Sakhalin-3. Though subject to the U.S. sanctions, this project is attractive to Mitsui & Co as its Yuzhno-Kirinskoye field has as much as 700bn c m of gas.
According to Fujiwara, his company is not going to give in to short-term fluctuations but is oriented towards mid- and long-term prospects.
The Yuzhno-Kirinskoye field alone can give 20bn c m a year, which is equivalent to 15mn tons of LNG. This is three times more than the enlarged Sakhalin-2 is expected to give. This is why Gazprom is planning to build Vladivostok LNG and to supply almost as much as Sakhalin-1 and Sakhalin-2 can give – 15mn tons. While being uncertain on Japan, the Oxford experts are confident that even at worst, in Asia, by 2025, gas consumption will be 30mn tons higher than it is today. This forecast has been confirmed by Nikkei’s report about new LNG terminal projects in Vietnam, Thailand, Indonesia and Singapore.
The example of China can help us to estimate the competitiveness of the Sakhalin LNG. As EADaily reported earlier, in Jan-Sept 2016, Russia enlarged its gas exports to China by 3.8 times to 356mn c m. This is not much but this is what Russia has for the moment. According to the Chinese Customs Office, that gas costs $236 per 1,000 c m, with only Turkmen gas and Australian LNG being cheaper ($185 and $220, respectively).
According to Grivach, the Sakhalin LNG is not the only factor that can cause a shift on the Asian gas market. In 2019, Russia’s pipeline gas may become an even stronger factor.
The Power of Siberia will help Russia to supply China with as much as 38bn c m a year or even more. On top of this, during his visit to Japan, Russian President Vladimir Putin said that they were considering plans to build a gas pipeline from Sakhalin to Hokkaido.