Sunday Tangent: Economist on Japan buying LNG from Sakhalin (finally!) and Hokkaido’s missed opportunities
Posted by arudou debito on April 26th, 2009
Hi Blog. I spotted this recent Economist article (I have a paper subscription; call me retro) over lunch last week, and was surprised to see that Japanese industry, after decades of wait (see article below), has finally bought Russian fuel. About time.
Living in Hokkaido for more than twenty years now has given me a number of insights by osmosis regarding our extremely proximate Russian neighbor (in three places — Wakkanai, Nemuro, and Rausu — mere kilometers away), and how that affects business.
First, Japanese and Russians tend not to get along. We still have no peace treaty (merely an armistice) with Russia after the 1945 seizure of the Northern Territories (and the big loss of southern Sakhalin, still called by its prewar name “Karafuto” by not a few Hokkaidoites). We also get occasional articles in the Hokkaido Shinbun reminding the public of pre-surrender Soviet submarine raids off Rumoi, and the impending invasion of northern and eastern Hokkaido before McArthur stepped in. Old people still remember postwar Russian concentration camps and forced repatriations from lands they feel they rightfully settled. And even today, the rough-and-tumble nature of the Russian that Hokkaidoites most frequently come in contact with (the sailor) was at the heart of the exclusionism behind the Otaru Onsens Case. The Japanese military, excuse me, “Self Defense Forces” still have a very strong presence up here (even building our snow sculptures) to ward off possible Soviet invasions, and keep us from getting too friendly with (or receive too many Aeroflot flights from) the Rosuke.
Second, Hokkaido has for years been unable to take advantage of the goldmine just off their shores. Potential deals with Sakhalin have not only been stymied by foot-dragging government bureaucrats (and the occasional businessman who, according to business contact Simon Jackson of North Point Network KK, cite business deals gone sour with the Soviets around three or four decades ago!). The most ludicrous example was where overseas energy interests were considering opening offices in Sapporo in the early 1990s (for Sapporo’s standard of living was far higher than that of Yuzhno-Sakhalinsk). But they took one look at the toolshed that was essentially the Hokkaido International School back then and decided their relocated families needed better educational opportunities. The Hokkaido Government has since rectified that with a much nicer building for HIS, but it remains in the annals of bungled policy and opportunities. Thus Sapporo missed out on all the gobs of riches that oil money provides anywhere (viz. Edmonton or Calgary) as the end of the era of cheap petroleum makes exploration and development economically feasible just about anywhere.
Third, as the article demonstrates below, Tokyo seems to be skipping over Hokkaido again with its first LNG deal. If we had set up the infrastructure when we had the chance, we could be getting some of that value-added. Granted, doing business in Russia (what with the shady elements posing as dealers and administrators) is pretty risky. But it seems in keeping with the historical gormlessness of Hokkaido (what with all the crowding out of entrepreneurial industry through a century of public works), and the maintenance of our island as a resource colony of the mainland. See an essay I wrote on this way back in 1996, and tell me if much has changed.
In fact, it seems the only reason Japan has come round to dealing with Sakhalin at all is because increasingly mighty China is squeezing them out of the market, according to The Economist below.
Enough comment from me. Here’s the article. It reflects none of the background I give above, sadly. Hokkaido’s perpetual non-player status means we’re skipped over again. Arudou Debito in Sapporo
Energy in Japan
Raising the stakes
Apr 8th 2009 | TOKYO
From The Economist print edition
Low prices and a strong yen give Japanese firms an opportunity to buy abroad
WHEN Energy Frontier, an enormous tanker, glided into Tokyo Bay on April 6th from Sakhalin Island, she was not just carrying the first shipment of liquefied natural gas (LNG) from a problematic Russian venture, under a deal signed 15 years ago. She was also bearing the symbolic weight of Japan’s aspirations to greater energy security. Lacking natural resources, Japan imports more than 95% of its energy. Almost all its oil and a quarter of its LNG come from the Middle East. To reach Japan ships must travel for 20 days, passing near pirate-infested waters. Sakhalin, by contrast, is just three days away.
In 2006 the Japanese government called on industry to increase its ownership of foreign energy projects to cover 40% of Japan’s energy needs, up from 15% at the time. The idea was to make the country less dependent on the spot market in case of trouble by taking stakes in various energy projects around the world. But as prices soared and China became a keen buyer, slow-moving Japanese firms found themselves being shut out of deals.
Today, however, many energy projects are starved of capital because of the credit crunch, energy prices are low and the yen is strong. Since mid-2008 the price of crude oil has fallen by two-thirds and the yen had at one point appreciated by as much as 20% against the dollar. This has given Japanese energy firms a window of opportunity to make foreign acquisitions.
In January Nippon Oil bought rights to oilfields in Papua New Guinea. Inpex, Japan’s largest oil-development company, has acquired rights to oil in South America and Australia. A consortium that includes Nippon Oil and Inpex is vying for rights to a project in southern Iraq. And this month Hugo Chávez, Venezuela’s president, visited Tokyo to sign energy deals.
“We have been very quietly shifting the gravity of our strategy from exploration and ‘greenfield’ projects to acquisitions and exchange deals,” says Tadashi Maeda of the Japan Bank for International Co-operation (JBIC), a state-backed lender for foreign projects. Deals rather than digging lets Japan obtain resources faster, he says. JBIC can put around $12 billion a year towards energy acquisitions.
The Japanese government’s 40% target is immaterial, Mr Maeda asserts. Instead, JBIC’s aim is to ensure that the market functions smoothly and that the fuel can be transported to Japan if necessary. A stake in an oilfield does not always entitle the owner to a share of its output, rather than a share of the revenue when the oil is sold on the open market. But ownership helps absorb the shock of sudden price increases or tight supply. And some contracts do specify that in the event of a crisis, output is reserved for the owners.
So far the Japanese firms’ deals have been small, raising concerns that they may be missing their chance to buy at a favourable time, says David Hewitt of CLSA, a broker. Yet the hesitation is understandable. Lower energy prices means certain projects are no longer viable. Some firms, including Mitsubishi and Mitsui, are expected to have to write off portions of recent investments, making them wary of new deals. Even when capital is available, taking on debt can jeopardise a firm’s credit rating. And the recession has reduced Japan’s energy use by 10-20%.
Japanese executives also complain that Chinese firms, which have plenty of capital from state-run banks and face less pressure to show profits, are overpaying and driving up prices. JBIC encourages Japanese firms to form consortiums to increase their heft. In February Toshiba, Tokyo Power and JBIC took a joint 20% stake in Uranium One of Canada—a deal that suits everybody’s interests but which no party could have achieved on its own.
The shipment of LNG that arrived in Tokyo this month came from the giant Sakhalin II project, set up in the 1990s by Royal Dutch Shell, an Anglo-Dutch oil giant, in partnership with Mitsubishi, Mitsui and other Western firms. At the time it was the only big energy project in Russia that did not involve a local partner. That changed in late 2006 when Shell and its Japanese partners reluctantly agreed to sell a 50% stake to Gazprom, Russia’s state-controlled gas giant. This highlighted the political risks involved in the pursuit of energy security—and why having the government represented, via a state-backed lender like JBIC, is not a bad idea.
The Sakhalin II project will produce as much as 9.6m tonnes of LNG a year, 60% of which will go to Japan, accounting for about 7% of its LNG imports. For Japan, the project’s proximity is its main appeal. Parts of Sakhalin were Japanese territory in the late 19th and early 20th centuries, and were ceded after Japan’s defeat in the second world war. Today’s commercial battles are less bloody, but no less intense.