VZCZCXRO1705
RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #6578/01 3210304
ZNR UUUUU ZZH
R 170304Z NOV 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 8379
INFO RUEHMO/AMEMBASSY MOSCOW 1356
RUEHFK/AMCONSUL FUKUOKA 8837
RUEHNAG/AMCONSUL NAGOYA 8457
RUEHNH/AMCONSUL NAHA 1336
RUEHOK/AMCONSUL OSAKA KOBE 2242
RUEHKSO/AMCONSUL SAPPORO 9885
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NSC WASHDC
PROG

UNCLAS SECTION 01 OF 02 TOKYO 006578 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT. PLEASE PASS TO INR:BEN GOLDBERG, E/B:JWECKER, 
JEIGHMIE. NSC PLEASE PASS TO JSHRIER, KTONG; DOE PLEASE 
PASS TO DOE/PI: DPUMPHREY, JNAKANO. 
 
E.O. 12958: N/A 
TAGS: ENRG PREL PGOV JA
SUBJECT: MITSUI & CO. CONFIDENT RUSSIA WILL ALLOW SAKHALIN 
2 TO CONTINUE 
 
 
¶1. (SBU) Summary.  On October 27 Econoff met with Mitsui & 
Co. General Manager of Planning Ken Yamaguchi and General 
Manager of Sakhalin Development Toru Matsui to discuss Mitsui 
and Co.,s investments in the Russian Sakhalin 2 oil and gas 
project.  (Note: Sakhalin 2 is owned by Sakhalin Energy, a 
consortium consisting of Royal Dutch Shell, which holds a 55 
percent stake, Mitsui & Co. with 25 percent; and Mitsubishi 
Corp. with 20 percent.  Sakhalin 1's primary shareholder is 
ExxonMobil.)  Matsui emphasized his belief that the Russian 
Ministry of Natural Resources and Energy has no intention of 
nullifying the Sakhalin 2 project over environmental 
violations.  He identified the real issues as the huge cost 
overruns of the project and Russian gas major Gazprom,s 
desire to become part of the project.  Matsui also commented 
that the term "energy nationalism" did not apply to Japan, 
adding that the Japanese government has very little influence 
in Japan's energy market.  End summary. 
 
The Sakhalin 2 Problem - Mitsui's Perspective 
--------------------------------------------- -------------- 
¶2. (SBU) On October 27, Econoff met with Mitsui & Co. General 
Manager of Planning Ken Yamaguchi and General Manager of 
Sakhalin Development Toru Matsui to discuss Mitsui and Co.,s 
investments in the Russian Sakhalin 2 oil and gas project. 
(Note: Sakhalin 2 is owned by Sakhalin Energy, a consortium 
consisting of Royal Dutch Shell, which holds a 55 percent 
stake, Mitsui & Co. with 25 percent; and Mitsubishi Corp. 
with 20 percent.  Sakhalin 1's primary shareholder is 
ExxonMobil.)  According to Matsui, the Russian Ministry of 
Natural Resources and Energy has no intention of nullifying 
the project and noted that this was supported by the 
Ministry,s October 25 statement to that effect.  Yamaguchi 
claimed that the environmental violations were not 
substantial, certainly not significant enough to stop the 
project.  The real issues, said Matsui, were the cost 
overruns--the price has ballooned from $9 billion to $21 
billion--and the desire to have Russian gas major Gazprom 
participate in the project. 
 
¶3. (SBU) Sakhalin Energy has already submitted a revised 
budget to the Ministry in response to concerns over the cost 
overruns and is awaiting a response, according to Matsui.  As 
for Gazprom,s participation, he said that any and all 
investors are welcome and that Gazprom and Shell are 
currently negotiating terms for Gazprom to join the 
consortium.  Asked about press reports claiming Mitsui & Co. 
and Mitsubishi Corporation were considering selling some of 
their shares to Gazprom, Matsui admitted it was possible but 
that nothing had been decided yet. 
 
Sakhalin 2 Progress 
------------------------- 
¶4. (SBU) Matsui clarified the status of Sakhalin 2 by 
explaining that Phase 1 of the project has been completed but 
that it only includes oil production and then only during the 
summer months when ships are able to reach the port of 
Nakhodka at the southern tip of Sakhalin.  Phase 2, on the 
other hand, will provide annual production of natural gas as 
well as oil and is about 80 percent complete.  The remaining 
20 percent includes completion of an off-shore facility and 
an 800-kilometer pipeline to carry the oil and natural gas 
south.  Phase 2,s oil production is expected to begin at the 
end of 2007 and gas production should start in 2008. 
 
About Mitsui & Co 
------------------------ 
¶5. (SBU) Yamaguchi noted that Mitsui & Co.,s energy business 
operations cover everything from the exploration of oil and 
gas fields to the retail sale of gasoline.  In addition to 
Russia, the company has interests in the Middle East, 
Southeast Asia, Australia, New Zealand, and the Gulf of 
Mexico.  Mitsui works closely with its Japanese 
clients--mainly utility companies--to secure long-term 
natural gas contracts and Japanese utility companies have 
purchased over 50 percent of Sakhalin 2,s projected natural 
gas output.  (Note: Oil requires no long-term contracts and 
is simply placed on the world market.)  Yamaguchi also noted 
that Mitsui & Co. sometimes uses the government institution 
 
TOKYO 00006578  002 OF 002 
 
 
Japan Bank for International Cooperation (JBIC) to finance 
its operations but explained that companies receiving JBIC 
funding must meet certain conditions and that negotiations 
frequently are prolonged, which makes this sort of financing 
less than ideal. 
 
Japan's Natural Gas Infrastructure 
------------------------------------------- 
¶6. (SBU) Yamaguchi reminded Econoff that Japan is the largest 
liquefied natural gas (LNG) consumer in the world and 
therefore must make large, long-term investments.  For 
geographical reasons, Japan has never built a national gas 
pipeline infrastructure.  Instead, utility companies have 
carved up the country among themselves and built terminals in 
nearby ports to re-convert imported LNG to its gaseous state. 
 The utility companies, consumers tend to be located nearby, 
eliminating the need for an extensive pipeline network. 
 
Energy Nationalism and GOJ Influence 
--------------------------------------------- ------ 
¶7. (SBU) Asked about energy nationalism, Yamaguchi admitted 
the term was being applied to some oil-producing countries 
but said he thought the term did not apply to Japan.  He 
observed that every government has the responsibility to 
secure energy for its citizens but that this was not energy 
nationalism.  He added that the GOJ has less influence over 
Japan,s energy industry and energy market than ExxonMobil 
has. 
 
Comment 
------------- 
¶8. (SBU) Matsui and Yamaguchi appeared very knowledgeable 
about the Sakhalin 2 project.  Mitsui & Co. has a vested 
interest in seeing this project through, not only because it 
owns 25 percent but also because the company has secured many 
of the long-term gas contracts with Japanese utilities. 
Matsui,s final comment on energy nationalism and the GOJ,s 
lack of influence in the energy arena was especially notable 
given recent government efforts to devise a national energy 
plan to decrease Japan,s dependency on oil and increase its 
use of natural gas.  Japanese energy companies--or at least 
this one--appear more likely to conduct business from a 
corporate viewpoint than a national one. 
DONOVAN