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Special Bulletin

A Japanese Perspective on the International Energy Landscape (121)

February 22, 2013

New Moves Seen for LNG Development in Russian Far EastKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan

New moves have been seen for developing natural gas/LNG in the Russian Far East andEastern Siberia. On February 13, Russia's largest oil company Rosneft and international oil major
ExxonMobil agreed to expand their cooperation under their 2011 Strategic Cooperation Agreement.
The new agreement subjected seven new blocks over a 600,000-square-kilometer area of the Russian
Arctic continental shelf to their joint exploration and gave Rosneft the option to acquire a 25%
interest in ExxonMobil's Point Thomson development project in Alaska's North Slope. In addition,
they agreed to conduct a joint feasibility study on a potential LNG project in the Russian Far East.

The Russian Arctic and Alaskan gas development sites are in frontier regions under severe
climatic and environmental conditions. These companies will have to clear very high technologicaland economic hurdles in hopes of developing massive resources. These challenging projects are
expected to attract much attention in the future. At the same time, we must pay great attention to thestudy on the potential LNG project in the Russian Far East as its fate and future development arevery significant for predicting the LNG/natural gas market in Japan and the whole of Asia.

Natural gas/LNG development projects in the Russian Far East and Eastern Siberia havebeen expected to provide new large gas supply sources geographically close to Asia where gas
demand has been growing. Asia includes Japan whose LNG imports have increased fast since theFukushima nuclear plant accident. South Korea has become the world's second largest LNG importer
after Japan and is expected to steadily expand gas demand. China is expected to substantially
increase gas demand as it is required to shift to cleaner energy sources for its further economicdevelopment. The Association of Southeast Asian Nations has emerged as a new LNG-consumingregion. Asia has thus been positioned as a promising growth market for Russia to substantiallyexpand gas sales channels. Particularly because Russia has been put into a difficult position inEurope, its traditional mainstay market, due to slumping gas demand and pressures from importers
and consumers over gas sale and pricing conditions, it is now required to take the new strategy of“Looking East”. It is indispensable for Russia to develop an Asian market strategy.

When announcing the new agreement, Rosneft and ExxonMobil released a plan to form a1

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joint working group in a few weeks to study the viability of the LNG project using available naturalgas resources. As the new LNG project is about to be considered, we may have to pay attention toRussia's domestic political tug-of-war and power balance over LNG exports as well as theconsideration of and decisions on purely economic and technical feasibility.

Traditionally, state-run Gazprom has taken exclusive charge of natural gas/LNG exports inRussia. But movements have emerged in Russia for liberalizing LNG exports. On February 13,
President Vladimir Putin instructed relevant authorities to consider the gradual liberalization of LNG
exports. The announcement of the Rosneft-ExxonMobil agreement on the LNG project study
coincided with the instruction, indicating that the study may trigger diversification of Russian LNG
export players. But the emergence of new players could change and complicate competitive
conditions for the traditional LNG/natural gas export plans that Russia has considered.

"Available natural gas resources" to be used for the Rosneft-ExxonMobil project may
attract much attention. The resources could be new or ones discovered earlier and left undeveloped.
Depending on the resources, the project's feasibility including economic efficiency may differ. In thisrespect, some reports stated that Rosneft and ExxonMobil could consider using gas resources put
under the Sakhalin 1 project.

As for Sakhalin gas development, LNG exports have been successfully started under theSakhalin 2 project in which Gazprom participates along with Japanese trading houses Mitsui & Co.
and Mitsubishi Corp. Sakhalin 2 participants are considering additional LNG facilities to expand
exports. Also under consideration is the Vladivostok LNG project in which Japan and Russia arecooperating under a memorandum signed on the occasion of the Vladivostok summit of theAsia-Pacific Economic Cooperation forum last year. Gazprom is participating in this LNG project.
In addition, there are plans to lay pipelines for natural gas exports to South Korea via North Korea
and to Japan from Sakhalin. Multiple plans thus exist to export LNG and natural gas to the Asianmarket. Rosneft's study on the new LNG project may greatly affect competition between theseprojects.

After the Rosneft-ExxonMobil agreement was announced, Rosneft CEO Igor Sechinvisited China from February 17 and came to Japan on February 19 for his exchange of opinions withthe two countries' energy experts. He may be implementing his positive Asian strategy based on theRosneft-ExxonMobil agreement. Rosneft's future moves could become the most important factor todetermine the fate of gas development in the Russian Far East for the Asian market. Meanwhile,
former Japanese Prime Minister Yoshiro Mori met with Russian President Putin in Moscow onFebruary 21 to discuss various topics including bilateral energy cooperation. Mori handed Prime
Minister Shinzo Abe's personal letter over to Putin and had wide-ranging discussions with theRussian leader toward enhancing Japan-Russia relations, laying the groundwork for Prime Minister
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Abe's visit to Russia. Given the significance of energy problems to the two countries, we may haveto pay close attention to high-level bilateral discussions on energy cooperation including
LNG/natural gas development and to future bilateral cooperation achievements.

Contact: report@tky.ieej.or.jp
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http://eneken.ieej.or.jp/en/whatsnew/JPOIEL.html

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