Friday, February 20, 2009

Russian Natural Gas to Asia

Published: February 18, 2009 - New York Times
MOSCOW — Russia has profited handsomely from natural gas exports to Europe. Now, after years of false starts and disputes, and mutual suspicions between Moscow and Beijing, Russia is turning its attention to Asia.

The moves are prompted by both the promise of a marriage of Russian resources with Asian manufacturing, and Russia’s financial desperation as interest from Western banks and investors dries up.

On Wednesday — just a day after agreeing to supply oil to China for the next 20 years, in exchange for $25 billion in loan guarantees — Russia opened its first liquefied natural gas plant to supply fuel to Asia.

The plant, built on Sakhalin Island north of Japan and part of the $22 billion Sakhalin 2 development, will greatly expand Russia’s natural gas empire. In fact, futures contracts have already been signed to ship Russian gas as far away as the West Coast of the United States.

The Russians are hoping Asian governments, with their enormous cash reserves, can compensate for the vast sums Western investors have pulled out of Russia in recent months. China, meanwhile, sees an opportunity to invest cheaply in natural resources it will need when its economy recovers.

Sakhalin 2 is the largest Russian energy project supplying Asia to come into production to date.

Though partly nationalized by the state energy company Gazprom in 2006, it is still operated by its original developer, the British-Dutch oil giant Royal Dutch Shell. Two Japanese trading houses, Mitsui and Mitsubishi, are also partners.

The development links three offshore platforms, hundreds of miles of pipelines and the liquefied natural gas plant along an isolated stretch of Pacific coastline. When it reaches full capacity in 2010, it will chill and ship about 5 percent of the world’s liquefied natural gas supply.

President Dmitri A. Medvedev of Russia and Prime Minister Taro Aso of Japan attended the opening Wednesday.

Apparently addressing worries in Europe over Russia’s use of energy as a political weapon, Mr. Medvedev struck a conciliatory tone, acknowledging that “mistakes” were made in Russian energy policy in the past.

“At times we do not fully calculate political risks and practical consequences,” Mr. Medvedev said, without elaborating, according to the Itar-Tass news service.

Still, Russia’s energy ambitions in the Asian Pacific are only gathering momentum.

This week, Russia’s national oil company, Rosneft, and national pipeline operator, Transneft, completed a deal for $25 billion in loans from the China Development Bank. In exchange, the Russian companies agreed to provide 300,000 barrels of oil a day to China over 20 years through a trans-Siberian oil pipeline that is scheduled to reach China in 2010.

Russia’s economic situation has so deteriorated that even typically upbeat financial analysts have been taking on a funereal tone.

Chris Weafer, chief analyst for UralSib bank in Moscow, published a research note Wednesday describing the Russian equity markets as “a highway along which asset valuations and investor sentiments are being driven by the infernal troika of oil, ruble and economy. All three of which have reached the banks of the river Styx and are scrambling to find the appropriate number of kopeks to pay the ferryman.”

In a measure of Russia’s economic troubles, corporations here must repay $117 billion in debt to Western banks this year, in a stark reversal from the inflow of foreign investor money that buoyed Russia’s economy in recent years.

Thus, the $25 billion oil deal with China will offset nearly a quarter of this so-called capital account deficit in 2009. This deficit is one factor pushing down the ruble’s value and depressing the Moscow stock exchanges.

If the global recession deepens, the Kremlin may be willing to put more on sale, economists say.

“If the situation remains tense in Russia and the world economy, we will see more concessions to China,” possibly in metals or mining as well as energy, Vladimir I. Tikhomirov, chief economist at UralSib, said in a telephone interview.

The Sakhalin 2 site, in the works since the early 1990s, has had a turbulent history. In 2006, a Russian environmental regulator threatened to halt work on a pipeline, claiming illegal logging and damage to salmon streams.

After a tense few months, Shell and the Japanese trading houses agreed to sell 50 percent plus one share — a controlling stake — to Gazprom for $7.45 billion. After the sale, the environmental objections were lifted.

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