Sakhalin’s LNG Plant And Its Implications

April 2009 Vol. 236 No. 4

Professor Stephen Blank, Strategic Studies Institute, Carlisle, PA

In February 2009, Russia and Japan opened the liquefied natural gas (LNG) plant at Sakhalin II, thereby inaugurating Russia’s first LNG producing plant. This important Russian achievement has significant consequences for Moscow’s energy policy in the Far East and potentially beyond that to include Europe and possibly North America.

This deal supplies Osaka Gas with more than 967 Tcf or 200,000 tons of LNG per year for at least the next 20 years. Supposedly, this deal also stimulates Russo-Japanese cooperation as gas will also go to Tokyo Electric Power and seven other Tokyo gas companies. Contracts to supply gas to South Korean and U.S. companies have also been signed.

There are reports that Japan will also contribute $7 billion to the completion of the East Siberian Pacific Ocean oil pipeline (ESPO) from Taishet to Kozmino Bay in Russia’s Maritime Province even though the costs have risen substantially and are still rising. Then Japan would be able to buy what Russia hopes will be large-scale oil production, above and beyond what Russia has already earmarked for China from the ESPO and its branch from Skovorodino to Daqing.

Russia’s Ministry of Foreign Affairs also reported that both sides reached agreement on reinvigorating bilateral cooperation in energy, specifically the possibility of creating an LNG and gas chemical plant in Russia’s Maritime Province (also known as Primorskii Krai) as well as the development of coal fields in Yakutia and Tuva. Japanese Prime Minister Taro Aso made clear his hope that this project will inspire further efforts at Russo-Japanese cooperation to develop energy and other industries in the Russian Far East and to improve bilateral political relations, including the search for innovative and even unorthodox ways of settling the 65-year-old dispute over the Kurile Islands.

While Sakhalin gas is to be the raw material base for the LNG plant, gas will be supplied through the Sakhalin-Khabarovsk-Vladivostok pipeline that is supposed to begin construction later this year and be completed in 2011. Clearly, Sakhalin II is planned to be part of the developing Far Eastern energy complex with ESPO, and the building of tankers to carry LNG to the mainland, railroads and ports. Thus the Sakhalin II plant is an important component in Russia’s overall strategy to revitalize its Far East role and convert it into a reliable long-term and large-scale energy provider for Northeast Asia.

Success in that larger endeavor, it is safe to say, will be a crucial determinant as to whether Russia can play a major role in East Asia in the future. Gazprom’s Deputy Chairman, Alexander Medvedev (no relation to the Russian President Dmitry Medvedev), also expressed his hope to see cooperation with Japan go beyond LNG to encompass manufacturing gas-chemical products.

But we should also remember that in 2006 the Russian government forced the Japanese and other foreign companies involved here – Mitsui, Mitsubishi, and Shell – to sell their majority stake to Russia, so we should be cautious concerning reports about expectations of forthcoming large-scale Japanese investment in Russia in general and in energy projects in particular.

And, given Russia’s past history of grandiose but woefully under-fulfilled plans for Siberia and the Far East, we should also be wary of promises that major infrastructural projects will be completed on time and at cost, especially under the conditions of the contemporary global economic crisis. It also is possible, in view of China’s plans or proposals for at least a dozen LNG terminals, that some in Russia hope to sell China gas from Sakhalin II’s or other future LNG holdings now that it has mastered the technology for doing so.

Finally, President Dmitry Medvedev professes that completion of this project greatly strengthens Russia’s position as a global gas supplier and this may well be the case insofar as Europe is concerned. Thus, Gazprom is simultaneously looking to get Spanish companies to participate in gas development and liquefaction in Russia, first of all at the Yamal project. Russia’s interest in buying into the Spanish firm Repsol is openly linked to this objective of getting Repsol to lead the way in such projects, thereby allowing Russia to sell Europe LNG through a company where it has a commanding, if not controlling, stake.

Meanwhile, President Medvedev also claims that Sakhalin II will be able, at full capacity, to produce around 10 million tons of LNG and up to 5% of global LNG supplies annually, allowing Russia for the first time to bring LNG to Europe as well as through existing pipelines and further extend its hold on Europe’s gas consumption. Certainly, there is no danger of a third country blocking seaborne transport of LNG as is the case with Ukraine and Europe. Instead, the danger is that Russia will gain sizable blocking, if not controlling, shares in both pipeline supply of natural gas and LNG to Europe where it can then convert its superior economic position into an even more commanding political dominance.

There is already no doubt that the magnitude of Russian gas exports to Europe has exercised demonstrable political influence upon European chancelleries on a host of issues, many of which bear no relationship to energy questions such as NATO enlargement.

It is also clear that Russia has “strong hopes” of engaging Japan politically to resolve the issue of the Kurile Islands and securing Japanese funding for future energy plans in Asia since Japan now claims that “Russia has become a constructive partner in the Asia Pacific region.” Thus, President Medevedev insists that Gazprom will be a reliable long-term supplier to Japan.

This is important for Japan since the project will account for 7.2% of Japan’s LNG imports. Indeed, in 2007 Russia approved its Eastern Gas Program that calls for spending $28 billion to link the Kranoyarsk, Irkutsk, Yakutsk, and Sakhalin gas fields into a unified gas supply system (UGSS) that could be used with LNG facilities to sell gas to Japan, South Korea and even the United States. Thus, Sakhalin could be the first step in a planned Russian campaign to enter into the U.S. LNG market with potentially significant economic and political consequences.

Nonetheless, it is clear that extraordinary efforts must first be made to find a solution to the blocked political cooperation between Russia and Japan due to the Kurile Islands issue that has frustrated every effort at deep rapprochement since 1945. If those questions cannot be resolved, it is unlikely that Sakhalin II and its LNG plant will attain the maximum level of benefits that Moscow, Tokyo, and possibly Seoul hope to gain from it. Neither will further efforts at energy cooperation achieve their full potential without a prior political resolution of outstanding Russo-Japanese issues.

Apart from the fact that in Russia and Japan strong domestic factions have powerful political connections in both capitals and equally powerfully developed and inflexible views on the issue, it also seems clear that Moscow is unwilling to entertain even raising the question of the Kurile Islands belonging to Russia, a stance that limits the possibilities of progress on this issue from the outset.

Moscow has again recently stated that South Sakhalin and the Kurile Islands were attached to Russia lawfully by the decision the Allies made in 1945. They are an inseparable part of the Russian Federation. This is an objective reality formed on the results of World War II and [is] solidly based on international laws. Any attempts to question this reality, no matter what reservations they are accompanied with, are unacceptable.

Moreover, Russia also warns Japan against raising the issue, lest it disrupt bilateral relations including energy deals. It is obvious that such statements do not facilitate the joint constructive work of developing the Russo-Japanese cooperation and cause significant damage to the general positive atmosphere of the bilateral relations, confidence, and good neighborliness, which are indispensable in resolving the existing complex bilateral issues.

Clearly, despite this deal, the prospects for political resolution of this issue and a subsequent breakthrough on bilateral economic relations (although the main reason for their limitation is Japanese business’ distrust of Russian economic policies and conditions) are not good and that may limit future economic cooperation.

Finally, Sakhalin II is also important for South Korea as it too will be receiving LNG from here that will be much cheaper and more reliable than Middle Eastern gas. Second, when the gas from Sakhalin II is added to other gas pipeline projects that are being discussed between Seoul and Moscow, the total size of the imports South Korea receives could become quite substantial, a major benefit from Seoul’s and Moscow’s perspectives.

Indeed, it is clear that South Korea, building upon deals signed with Russia in 2008, is angling for a pipeline connection from Siberia to its territory. Samsung is interested in cooperating with Gazprom in the latter’s projects on the Yamal Peninsula and the Shtokman field in the Russian north and offered to provide its technologies in the projects although most analysts believe those gas deposits are earmarked for Europe. Seoul is also, not surprisingly, interested in importing oil through ESPO.

Thus, the opening of the Sakhalin II LNG plant could lead to significant transformations in the Northeast Asian gas market and potentially beyond that to Europe or the United States. But for this event to generate the most positive outcomes for Russia that it is counting on, not only must the economic crisis end soon, Russia has to invest billions that it does not now have into Siberia, obtain comparably large amounts of foreign investments from states that have ample reasons to distrust its predatory and sharp business practices, as well as its geopolitical aims, and come to terms with Japan over the Kurile Islands.

This is a very large, ambitious, and extraordinarily demanding agenda for any government, especially one as inflexible as Russia’s. Therefore, what happens to and around Sakhalin II cannot and will not stay at Sakhalin II.

(This article is not for citation or quotation without consent of the author. The views expressed here do not represent those of the U.S. Army,U.S. Defense Department or the U.S. Government).


Stephen Blank is Professor of Russian National Security Studies at the Strategic Studies Institute of the U.S. Army War College in Pennsylvania. Dr. Blank has beenProfessor of National Security Affairs at the Institute since 1989. In 1998-2001 he was Douglas MacArthur Professor of Research at the War College.

He has published more than 600 articles and monographs on Soviet/Russian, U.S., Asian, and European military and foreign policies, testified frequently before Congress on Russia, China, and Central Asia, consulted for the CIA, major think tanks and foundations, chaired major international conferences in the USA and abroad In Florence, Prague, and London, and has been a commentator on foreign affairs in the media in the United States and abroad. He has also advised major corporations on investing in Russia and is a consultant for the Gerson Lehrmann Group

He has published or edited 15 books focusing on Russian foreign, energy, and military policies and on International Security in Eurasia. His most recent book is Russo-Chinese Energy Relations: Politics in Command, London: Global Markets Briefing, 2006. He has also published Natural Allies?Regional Security in Asia and Prospects for Indo-American Strategic Cooperation, Carlisle Barracks, PA: Strategic Studies Institute, US Army War College, 2005.

Dr. Blank’s M.A. and Ph.D. are in Russian history from the University of Chicago. His B.A. is in history from the University of Pennsylvania.

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