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Cablegate: Mitsui & Co. Confident Russia Will Allow Sakhalin

VZCZCXRO1705
RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #6578/01 3210304
ZNR UUUUU ZZH
R 170304Z NOV 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 8379
INFO RUEHMO/AMEMBASSY MOSCOW 1356
RUEHFK/AMCONSUL FUKUOKA 8837
RUEHNAG/AMCONSUL NAGOYA 8457
RUEHNH/AMCONSUL NAHA 1336
RUEHOK/AMCONSUL OSAKA KOBE 2242
RUEHKSO/AMCONSUL SAPPORO 9885
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NSC WASHDC
PROG

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

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