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C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 000163 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 01/12/2016 
TAGS: PREL ENRG EPET RU JA
SUBJECT: JAPAN OFFERS FAVORABLE ASSESSMENT OF SAKHALIN 2 
DEAL 
 
REF: TOKYO 7113 
 
Classified By: Charge d' Affaires Joseph R. Donovan.  Reasons 1.4 (B) ( 
D) 
 
¶1. (C) Summary. The Kremlin,s aggressive move to increase 
Gazprom,s stake in the Sakhalin 2 project was largely driven 
by Russian domestic political considerations, MOFA Russian 
Division officials told poloffs recently.  Royal Dutch Shell 
(RDS) worsened things when it committed a &big blunder8 and 
&double-crossed8 the Russians.  Japanese officials, after 
warning Moscow that any unilateral decision to shut down 
Sakhalin 2 would turn the matter into a &very serious 
diplomatic issue,8 finally convinced President Putin to 
treat the Sakhalin 2 problem as a commercial, rather than a 
political problem.  Surprisingly, MOFA believes that the 
successful outcome has benefited overall Russia-Japan 
relations and may facilitate discussion in other areas, 
including the Northern Territories issue.  End Summary. 
 
----------------- 
Domestic Politics 
----------------- 
 
¶2. (C) On December 28, poloffs met with MOFA European Affairs 
Bureau Russian Division Director Kuninori Matsuda to review 
events connected with the Sakhalin 2 consortium,s recent 
decision to increase Russian Gazprom,s stake in the joint 
energy project.  According to Matsuda, Russia,s current 
policy with regard to the Sakhalin 2 energy project, and in 
particular Moscow's recent moves to increase Gazprom,s share 
in the project, have largely been driven by Russian domestic 
political considerations.  Russia,s current political scene 
is dominated by supporters of the three major political 
figures, Matsuda asserted, two of whom have positioned 
themselves to run in the presidential election: First Deputy 
Premier Medvedev, Deputy Premier and Defense Minister Ivanov, 
and Deputy Chief of Staff Sechin, who supports Putin.  From 
MOFA,s perspective, President Putin,s decision not to seek 
re-election in the March 2007 presidential election has 
motivated some of the president,s supporters to manufacture 
a crisis by creating political problems (including perhaps, 
he speculated, the assassination of Litvinenko in London). 
Sechin,s group wants to change the constitution in order to 
allow Putin to be re-elected, Matsuda said. 
 
¶3. (C) Further complicating the Sakhalin 2 issue, Matsuda 
continued, is the fact Medvedev and Sechin serve as 
presidents of Gazprom and Rosneft, respectively.  MOFA has 
heard rumors that Putin would like to be appointed president 
of Gazprom after leaving the Kremlin ) a platform that he 
would use as a springboard for the 2012 presidential 
election.  Based on the nexus that exists between high-level 
Russian government officials and the energy sector, MOFA had 
advised senior Japanese officials that &Gazprom is a 
presidential matter so it will be tough to stop8 the 
Sakhalin 2 restructuring. 
 
------------------- 
Royal Dutch Blunder 
------------------- 
 
¶4. (C) Royal Dutch Shell (RDS) also committed a &big 
blunder,8 Matsuda stated.  During negotiations held in 2006, 
RDS and Gazprom agreed to an equity swap that increased the 
Russian company,s share in the Sakhalin 2 project.  In 
exchange, Gazprom agreed to pay RDS a commission for use of 
the Siberian oil fields.  However, just a few days after the 
negotiations concluded, RDS, without consulting other 
Sakhalin 2 consortium members, announced that cost overruns 
on the energy project had increased from USD 10 billion to 20 
billion.  Matsuda pointed out that the revelation had the 
immediate effect of devaluing Gazprom,s equity in the 
venture, and put off by at least 10 years the time when 
Russian officials could hope to begin to recoup any profits 
from the project.  Mitsui and Mitsubishi, who were not 
 
TOKYO 00000163  002 OF 002 
 
 
informed of the decision until the last minute, were also 
&upset8 by RDS, &double-cross8 of the Russians, Matsuda 
claimed. 
 
----------------------------- 
Japan Limits Political Damage 
----------------------------- 
 
¶5. (C) Japanese government efforts then focused on trying to 
convince President Putin to treat the Sakhalin 2 issue as a 
commercial, rather than a political problem, Matsuda 
explained.  Tokyo told Kremlin officials that any unilateral 
decision to shut down Sakhalin 2 would turn the matter into a 
&very serious diplomatic issue.8  Japanese officials argued 
that a unilateral shutdown would disrupt much-needed energy 
investment in Russia by Japanese companies.  Matsuda also 
revealed that PM Abe telephoned Putin to press Tokyo,s case. 
 
 
¶6. (C) Moscow, Matsuda noted, eventually agreed to return to 
the commercial negotiations.  Those talks focused on three 
areas: 1) Gazprom,s participation in the project, 2) cost 
overruns, and 3) ecological concerns.  The consortium members 
eventually convinced Russian officials that the cost overruns 
were legitimate.  Matsuda observed that, after Gazprom had 
secured its participation on advantageous terms, &the 
ecological issues went away.8 
 
------------------- 
Bittersweet Win-Win 
------------------- 
 
¶7. (C) Matsuda, saying that Tokyo had managed to avoid a 
worse case scenario, outlined Japan,s gains from the 
recently concluded Sakhalin 2 deal.  The consortium brought 
Gazprom into Sakhalin 2 as a major stakeholder, a step that 
would &guarantee8 the project.  As partners in Gazprom, 
Putin and other high-level Russian officials would also 
provide direct political support for the energy deal. 
Matsuda insisted that the financial arrangement for the 
consortium partners was &satisfactory,8 and that the 
companies &would not have to worry about a class-action suit 
by stockholders.8 
 
¶8. (C) Reaching agreement on Sakhalin 2 increased the 
likelihood that the two sides would be able to reach an 
accommodation on future deals, &Sakhalin 3, 4, 5, and 6,8 
Matsuda suggested.  MOFA also believes that the diplomatic 
discussion improved the overall atmospherics between Russia 
and Japan and might facilitate discussion in other areas, 
including the Northern Territories issue.  In a parting 
remark, Matsuda asserted in a half-joking manner that the 
U.S., which had been &very active8 in communicating with 
Japan at start of the Sakhalin 2 situation, &suddenly 
stopped calling8 after Kremlin officials allegedly told 
Washington that Exxon,s investment in Sakhalin 1 would not 
be affected. 
DONOVAN