Aug 8, 2022
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Oil and gas is more important than sanctions: Japan does not want to lose Sakhalin

Oil and gas is more important than sanctions: Japan does not want to lose Sakhalin

Photo: Oleg Savin/TASS

Japan intends to keep the shares of its companies in the Russian offshore project Sakhalin-1. This was stated by the Minister of Economy of the country Kill Hagiud at a press conference. According to him, Japan understands that after Russian President Vladimir Putin signed a decree banning transactions with shares of foreigners from unfriendly countries, “transactions with shares and other assets of Sakhalin-1 will become impossible.” But now Tokyo is “finishing the details” and trying to figure out how to stay in this project.

“There are no changes in our position on maintaining the shares of our companies. In any case, the state and business will work together to ensure stable energy supplies. Sakhalin-1 companies should not sell their shares to third countries or third companies, as for us, we continue to follow the same course and there are no changes in the situation,” Khagiuda said.

He emphasized that Sakhalin-1 plays a big role for the country, as it is an “important source of supplies outside the Middle East”, on which Japan already depends by 90%.

Sakhalin-1 is one of the largest Russian offshore oil production projects, which is being developed under production sharing agreements. Rosneft owns 20%, ExxonMobil 30%, Japanese Sodeco 30%, and Indian ONGC Videsh 20%. The project operator is Exxon Neftegaz Limited. Sakhalin-1 produced more than 11 million tons of oil per year.

Earlier, Hagiuda said that Japan also wants to remain in the Sakhalin-2 gas project, in which, in accordance with the presidential decree, all rights and obligations will be transferred to the specially created Sakhalin Energy LLC. The Japanese government has already asked Mitsui and Mitsubishi not to withdraw from the Russian oil and gas project.

But, apparently, the situation on Sakhalin-1 is more difficult than on the gas project, due to the withdrawal of ExxonMobil from it. By the beginning of July, production “due to the imposed restrictions” decreased by 22 times – from 220 thousand to 10 thousand barrels per day, the Deputy Prime Minister of the Russian Federation admitted Yuri Trutnev.

“Because of downtime, not only budget losses arise, but also deterioration in the characteristics of fields, which can significantly affect the reduction in the oil recovery factor. This means that a large amount of oil will remain in the reservoirs,” the Deputy Prime Minister explained.

According to some experts, the problem is that US and EU sanctions have limited the supply of equipment to the project, which has led to problems in servicing offshore platforms. Also, according to ONGC, in April, oil shipments from Sakhalin-1 stopped due to the withdrawal of insurance from service vessels. The absence of the same solution as for Sakhalin-2 may be due to the need not only to transfer the operatorship from ExxonMobil to another company, but also to find a solution to the technological problems of offshore production in the face of sanctions and loss of competencies. Perhaps, if Japan is determined to stay in the project, she can help solve them.

However, Head of the Center for Analysis of Strategy and Technology for the Development of the Fuel and Energy Complex, Russian State University of Oil and Gas. THEM. Gubkin Vyacheslav Mishchenko told SP that there are no insurmountable technological problems at Sakhalin-1, the issue is more of a legal nature and can be resolved in the coming months. As for Japan’s continued participation in the project, it is possible, but only if Tokyo agrees to meet Moscow halfway on some issues.

All of this is subject to negotiation. Both sanctions and counter-sanctions are the result of the lack of legal and political mechanisms for work, which the Americans demolished due to the changing situation. Now a struggle for spheres of influence is unfolding in the world, and the notorious multipolarity is already a given. The lack of desire and ability to recognize this and fix it in international agreements leads to the fact that all parties work on such conditional things as “friendly” or “unfriendly” countries, and so on.

But this is not a given for centuries, but the current situation, and if we move towards each other, all this can be resolved. I think if the Japanese side shows a willingness to discuss the interests of the Russian Federation, an exception can be made for it.

As for the Sakhalin-1 project, the Japanese company Sodeco has 30% of it and, of course, it is very interested in staying and further exploiting this field, since Japan is energy and resource deficient. And these are neighboring territories, a short transport arm, participation in a large international project. For Japan, this is a serious prospect for several decades to come, an opportunity to receive nearby energy resources, and even to be shareholders of the project. They do not want to lose this share.

“SP”: – What is needed in order for them to retain their participation?

– Now it is difficult to say, since the nationalization of foreign shares was discussed. Companies from “unfriendly” countries took appropriate steps, ExxonMobil was forced to join the sanctions and announce its withdrawal. It was the operator of the project, which is being implemented under the PSA, a production sharing agreement signed back in the mid-1990s. This, by the way, is the only remaining vestige of that period, since the rest of the PSA projects are no longer active and have gone out of the legal field. From the point of view of taxation and access to resources, this is a fairly profitable project for foreign companies.

The fact that ExxonMobil has already withdrawn from the project has led to a halt in the operation of the main fields. In July, Yuri Trutnev officially announced that there were serious problems at the project and a drop in production by about 20 times. But I would note that this is a momentous moment, since the decline in production is not associated with man-made or other serious problems in the operation of the field, but with the refusal of the main operator to perform its functions.

Now there is a pause, which should soon end with something. The stake owned by ExxonMobil should be redistributed or transferred to other participants on a market basis. As far as I know, the Indian company ONGC Videsh, which already has a share of 20%, is actively claiming to increase it. We do not know what it will be, in my opinion, the Russian company Rosneft will become the operator and key shareholder of this project. I believe that the current pause will end with a redistribution of shares, the resumption of work of all mining capacities. Within six months, the Sakhalin-1 project will reach its design capacity of 220 thousand barrels. per day.

“SP”: – Will the Japanese remain in the project after this redistribution?

– They expressed an official desire to stay, but we understand that one desire or even a statement by the Minister of Economy is not enough. We also need actions that will show the desire of the Japanese to work in this Russian project. This is either a way out of sanctions, or cooperation on some kind of technology. A practical step must be taken, because the negotiating position must converge on both sides. To ask the Russian side for concessions, to stay in the project, but at the same time continue the sanctions policy, these are things that contradict each other.

I think we will see a reformatting of the project in the coming months. There will be a rejection of the PSA legal system, a change of operator to a Russian company and a redistribution of ExxonMobil shares. What will happen to the share of the Japanese company Sodeco will depend on Tokyo’s desire to show practical interest and provide Russia with guarantees of partnership behavior.

Director of the Energy Development Fund Sergey Pikin believes that Japan’s chances of remaining in the project are quite high, and this is a plus for Russia.

– In fact, the decree on the ban on transactions with shares for unfriendly countries contains a clause that they are possible with special permission from the President of the Russian Federation. I think that following the results of the negotiations, the Japanese will retain their shares in Sakhalin-1, and this is positive. The more foreign companies that remain in our projects, the better. This means that they are interested in Russia, and as long as big business is interested in Russia, there is a chance that he will oppose increased sanctions pressure. Because when billions of dollars are at stake, it affects decision making. If this interest does not remain, it will be possible to introduce any restrictions against us.

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