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Russia's Rising Oil Star By: Frederick W. Stakelbeck Jr.
FrontPageMagazine.com | Wednesday, October 04, 2006

A report provided to former Prime Minister Junichiro Koizumi in May from the Japan Forum on International Relations, an independent think-tank, highlighted the country’s ongoing struggles concerning the implementation of a comprehensive energy strategy. “Japan’s overall energy approach lags behind the changes occurring in the world. The strategic importance of energy has a far greater importance than is appreciated in Japan,” the report noted. The report went on to say that the country’s very “existence as a state” could be jeopardized if it does not develop a more strategic approach to energy security.

Japan, the world’s third largest energy consumer, currently imports 90 percent of its crude oil from the increasingly volatile Middle East, making the country’s continued reliance on the region a legitimate threat to national security. Recognizing the urgent need to secure alternative sources of energy to fuel its resurgent economy, the Japanese Ministry of Economy, Trade and Industry recently released its national energy strategy report calling for the country to strengthen ties with resource-rich countries located not only in the Middle East, but throughout the world. To meet this policy objective, resource-poor Japan has identified regional adversary Russia as a potential long-term energy partner for the 21st century.


According to the Oil and Gas Journal, an industry publication, Russia holds the world’s largest natural gas reserves, the second largest coal reserves and has the eighth largest oil reserves. The once hopelessly outdated Russian energy sector has accelerated production to over 9 million barrels per day (bpd), making the country the world’s second largest producer of crude oil behind energy giant Saudi Arabia.


At the conclusion of this summer’s G8 summit in St. Petersburg, Russia, both countries agreed to jointly construct an estimated US$6.5 billion East Siberia-Pacific pipeline that will eventually pump 80 million metric tons of crude a year, or 1.6 million bpd, from Russia’s Far East to the Asia-Pacific region. In addition, a consortium of thirteen Japanese companies known as the Sakhalin Oil and Gas Development Co Ltd has invested heavily in the massive Russian offshore Sakhalin I and II projects over the past several years, with the hope of securing much needed crude oil and natural gas.


But in a bizarre twist, Moscow announced in late September that it could not support all of the proposals made by foreign companies in the massive Sakhalin II project, after project costs doubled to an estimated US$20 billion. As a result, international energy-conglomerate Shell has said it will be unable to execute plans to construct a liquefied natural gas (LNG) plant designed specifically to supply the Japanese mainland starting in 2008. Moscow also informed foreign investors that special tax incentives implemented in the 1990’s to attract capital, could be discarded in the near future. Two major Japanese companies – Mitsui Sakhalin Development and Mitsubishi-owned Diamond Gas Sakhalin - are major stakeholders in the Sakhalin II project.


Almost immediately, Russian and Japanese officials met to review the developing situation, with Japan’s new Prime Minister Shinzo Abe saying the unexpected move could have a “negative impact on bilateral relations.” If either of the Sakhalin energy projects are cancelled or delayed for any significant period of time, Japan could lose a large portion of its investment. The country may also be forced to identify more remote and possibly hostile countries as energy suppliers, increasing the cost of energy for Japanese consumers. Moreover, future Japanese investment in potential oil and natural gas projects in the Russian Far East Republic of Sakha, the Kamchatka Peninsula and Magadan could also be jeopardized.


Energy consumption in Asia is surging and Japan will continue to be a dominant energy player for many years. The introduction of alternative energy sources such as nuclear and wind power are expected to gradually ease Japan’s energy burden over the next two decades. Of course, the country’s abundant deposits of coal will be counted upon to satisfy the country’s appetite for energy, as well.


With competing countries such as China, India and the U.S. looking to secure global energy resources, a long-term energy agreement with Russia would certainly address Japan’s immediate energy concerns; however, unresolved territorial claims regarding the Kuril Islands and problems with the existing Sakhalin II project remain unresolved. Both issues threaten the overall stability of the developing energy relationship. Tokyo’s energy position will also be affected by changing demographics, pending economic reforms, the Kyoto Protocol and the country’s evolving energy tax policy. 


To its credit, the Koizumi government made a determined effort during its several years in power to diversify the country’s energy supply stream. Joint exploration and development efforts in Central Asia and the East China Sea, the use of energy saving alternatives such as nuclear power and the creation of emergency response measures were all undertaken by Tokyo with some measure of success. But much more needs to be done.


An emboldened Russia now finds itself in a position to influence international energy markets and the foreign policy decisions of its neighbors in Asia. Russian President Vladimir Putin’s recent announcement of a US$630 million plan to develop the disputed Kuril Islands, or Northern Territories as they are referred to in Japan, is just another example of a confident Moscow. The road ahead holds many challenges for the  administration of Shinzo Abe. It will be enormously important, therefore, for the conservative leader to use a blend of pragmatism and cautious optimism when dealing with Russia, keeping in mind that energy independence, not further energy dependence, should be the country’s key objective.


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Fred Stakelbeck is a Senior Asia Fellow with Washington-based Center for Security Policy. He is an expert on the economic and national security implications for the U.S. of China's emerging regional and global strategic influence. Comments can be forwarded to Frederick.Stakelbeck@verizon.net.

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