Sakhalin’s LNG Plant And Its Implications

By Professor Stephen Blank, Strategic Studies Institute, Carlisle, PA | April 2009 Vol. 236 No. 4

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.