Land of rising investments

A flurry of energy deals have been signed during Prime Minister Vladimir Putin's visit to Japan this week in a sign that Russia needs greater cooperation in developing its enormous energy resources and increasing its exports.
Irkutsk Oil and the state-owned Japan Oil, Gas and Metals National Corporation (Jogmec) signed a deal on Tuesday to form a joint venture to develop two fields in Eastern Siberia. So far Japan has lagged behind other Asian investors, particularly China, in developing the natural resources geographically close to it.
Japan imports 80 per cent of its oil from Saudi Arabia, but investing in Russian fields could help lower costs as well as expanding its own energy industry.
"Japan needs to take a more active role, particularly in Eastern Siberia," said Valery Nesterov, oil and gas analyst at Troika Dialog.
Although production this year has increased slightly, some of Russia's smaller oil and gas fields are becoming depleted and to develop new ones they are appealing to Japan for investment.
"Russia is trying to attract more technologically advanced companies to develop the smaller ones to maintain a stable gross output level," said Pavel Sorokin, oil and gas analyst at Unicredit Aton.
Output from some of Russia's largest fields is also falling and companies are now looking to Japan for more investment as it has both the technical expertise and funding to develop some of the larger reserves.
"Japan, a country in sharp need of hydrocarbons, has both the intention and finance to develop the fields, giving us the required combination which the Russian government is rightly trying to put to use," said Sorokin.
Despite the necessity of securing increased foreign investment, Russia is in an awkward position as the government wants to keep hold of key assets. Jogmec was limited by law to only purchasing 49 per cent of the joint venture with Irkutsk Oil as the fields are considered to be strategically important.
"The understanding from Japanese companies is that Russia wants to limit foreign participation so they only invest in small projects," said Nesterov.
Gazprom also signed a memorandum of understanding with Japan about exploring gas projects in Eastern Russia. The company's CEO, Alexei Miller, told reporters that they would explore ways to process the gas near Vladivostok to supply Asia-Pacific countries.
The recent gas dispute with Ukraine and the fact that the Western European market is saturated has made the Russian monopolist look for other customers.
"Gazprom has been seeking to diversify its export routes for many years," said Natalya Milchakova, senior oil and gas analyst at financial company Otkritie. "On the one hand, transit problems are forcing Gazprom to look for a new market, but we believe that they are only a trigger for such a decision."
A pipeline between Sakhalin and Vladivostok scheduled to be built by 2011 will increase potential supplies to both Japan and China on the Asia-Pacific coast. Russia is also looking to expand its liquid natural gas (LNG) exports and Japan is expected to become one of the main consumers.
The "export of Russian LNG to Japan is currently in the project stage. Nevertheless, it is a very promising project, as global LNG demand, according to IEA estimates, could triple by 2015," said Milchakova.
Gazprom also announced that they are starting to develop the Sakhalin-3 field and will be looking for partners. Priority will be given to Royal Dutch Shell and two Japanese companies, Mitsui and Mitsubishi, because of their participation in the Sakhalin-2 project.
Talks will also be held on the future of the Kuril Islands near Sakhalin, which have been disputed territory since World War II, although it is unlikely that these tensions will affect business negotiations.
"In our opinion, these tensions could hinder some transactions; however, if Japan has an urgent requirement for LNG, the pragmatism in Russian-Japanese relations should prevail over old offences and emotions," said Milchakova.