Russia turns iffy on Japan gas future as Abe heads to Moscow

by and

Bloomberg

Russia’s Gazprom PJSC isn’t confident in Japan’s future as a growing natural gas user, which may damp prospects of a proposed pipeline between the countries as Premier Shinzo Abe travels to Moscow later this month.

“The demand situation in Japan is not clear yet for the next 15, 20, 25 years,” said Alexander Medvedev, deputy head of the Kremlin-backed exporter. The country’s nuclear reactor restarts, use of coal and rising energy efficiency are making the outlook for gas uncertain, he said in an interview at the Gastech conference in Chiba, Japan. The world’s biggest exporter sees brighter prospects in China.

Abe, seeking to deepen economic ties with Russia in an effort to resolve a 70-year-old dispute over islands off Hokkaido, is set to visit Moscow on April 27. Russian gas supplies to Japan, including the possible pipeline between the nations, could be discussed during the visit, Russia’s Kommersant newspaper reported last month.

Russia has turned to Asia as a growth market for its energy exports to balance its reliance on European buyers. It has challenged Saudi Arabia as the biggest crude seller to China and is aiming to become the country’s largest gas supplier through pipeline supplies from Siberia.

Meanwhile, the potential link to Japan, which has been under discussion for years, “has a history with its ups and downs,” Medvedev said during an interview Thursday. Abe’s meeting with Russian President Vladimir Putin in December created “a very positive environment for business,” but the project requires “a deep feasibility study” by both sides, he said.

The pipeline would need a minimum capacity of 8 billion cubic meters a year and optimally carry 20 billion to 30 billion cubic meters, according to Medvedev. That volume would equal as much as roughly a quarter of Japan’s demand. The nation is the world’s largest importer of liquefied natural gas.

Gazprom has at least two Asia-focused projects in Russia’s Far East, including a gas pipeline to China and an expansion of the Sakhalin-2 LNG project, co-owned by Royal Dutch Shell Plc along with Japan’s Mitsui & Co. and Mitsubishi Corp.

While partners have been weighing an expansion of the Sakhalin plant for years, new production is seen only as soon as 2023 by Gazprom and around 2025 by Mitsui.

“We see a lot of opportunities” for the Sakhalin venture in the future, however “the market is already supplied,” Medvedev said. There’s still a “huge potential” for customers in China, India, Vietnam, Bangladesh, Pakistan and Kuwait, he said.

Japan’s utilities have been using an increasing amount of coal instead of more-expensive gas, and the country’s gas needs are forecast to decline through 2021 due to returning nuclear power plants, flat electricity demand and growing use of renewables, according to last year’s outlook by the International Energy Agency.

Regulators have cleared over a dozen nuclear units for operation under new safety rules following the 2011 Fukushima disaster, but public opposition, particularly through the nation’s courts, has slowed restarts to a crawl. Only three of 42 operable reactors are online. Abe supports resuming the country’s reliance on nuclear power as a way to lower costly fossil fuel imports and cut carbon emissions.

All Gazprom’s planned routes to Asia, including the potential sub-sea link to Japan, could be fed by offshore fields that are part of the Sakhalin-3 project. While Gazprom has been in talks with Shell on transferring a stake in the project to the Hague-based company, there are so far no plans to invite Japanese partners, according to Medvedev.

“Third parties are not on the agenda now,” he said. “It’s our strategic principle that we invite foreign companies to our upstream projects only as part of strategically important asset swaps.”

Even asset swap talks with Shell “is not an easy exercise,” Medvedev said. One of the project’s key fields is targeted by U.S. technological sanctions.