Sakhalin news bad for Japan economy - and energy costs

May 2, 2007

The most recent news from Russia’s Sakhalin-1 and Sakhalin-2 energy projects is bad for Japan’s economy, which is highly dependent on imported oil and natural gas. Last Friday, Gazprom announced it has been negotiating to buy all the natural gas to be produced from Sakhalin-1, in which Japan has a 30% investment. This means that all the natural gas would go to Russia, and none to Japan, despite the years of financial investment and technical expertise Japanese companies brought to the project.

This announcement comes just months after Gazprom bought majority ownership in Sakhalin 2. (See Russia takes over Sakhalin-2)

What the Sakhalin news means to Japan’s economy
Analysts believe that Russia is positioning the state-owned Gazprom to take control of all the natural gas the country produces, most of which has been promised to China, Japan and other Asian countries. This is another step by Russian President Vladimir Putin to use Russia’s oil and gas reserves to gain political power in the world. Russia has close to one-third of the world's proven natural gas reserves, but controls only 20% through Gazprom. (See G-8 summit - Good for Putin and Russia)

Sakhalin-1 may be more difficult for Gazprom to take over than Sakhalin-2 was, according to Tass, the Russian news agency. That is because Sakhalin-2 was coming in way over budget, giving the government an excuse to “find” environmental regulations that had been violated. Sakhalin-1 is operating as planned, so any government take-over will be more blatant difficult to finesse.

However, this week, Prime Minister Shinzo Abe met with President Bush to begin tentative discussions about a potential Free Trade Agreement. Tentative, because both Japan and the U.S. have strong agricultural lobbies that want to protect their subsidies. However, Japan may be looking to strengthen its relationship with the U.S. to offset Russia’s growing power over its oil supply.

Abe is looking to secure more oil through a five nation tour of the Middle East. He will visit Saudi Arabia, the UAE, Kuwait, Qatar and Egypt. Japan already has an oil-supply deal with Iran.

Also, Japan is meeting with Kazakhstan to increase its supply of uranium by 30%. In return, Japanese engineers will help Kazakh companies increase their knowledge of peaceful nuclear technology. Kazakhstan has the world’s second largest supply of uranium, after Australia.

Action steps:
Natural gas prices are increasing: from $6.94/mcf in 2006, through $7.83/mcf this year to $8.11/mcf next year (EIA forecast). Talk to your financial planner about possibly increasing the amount of commodities funds in your portfolio.

For other ideas on how to protect yourself from the high cost of oil, get the WorldMoneyWatch report “Oil’s Hidden Threat”

Source: Japan Times, “Gazprom eyes exclusive purchase of Sakhalin-1 gas," April 29, 2007; ”Kazakhstan eyes uranium deal with Japan," May 1, 2007; "Abe looking for oil on Middle East trip," April 29, 2007; TASS, “Sakhalin-1 under scrutiny," April 19, 2007.

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