By Nikolay Khrenkov
Photos by Andrey Pomyan, Sakhalin Energy, ИТАР-ТАСС

Interview for Gazprom Monthly corporate Magazine
June 2010, # 6, page 34

Partnership

The questions from the magazine are being answered by Chairman of "Mitsui & Co. Moscow" LLC, Chief Regional Representative in CIS and Executive Managing Officer of "Mitsui & Co., Ltd" Sakamoto Noriaki.

– Dear Mr. Sakamoto, the partnership between Mitsui and JSC Gazprom dates from 1993 year. How did the cooperation between the companies start?

– Mitsui started its contacts with Gazprom from the early 90's right just after Gazprom establishment. Gazprom positively evaluated Mitsui's capability to arrange supply of technological foreign equipment (which could not be produced on the territory of the Russian Federation) and the possibility to arrange efficient financing. As a result, in 1993, Mitsui supplied a large number of construction machinery and other equipment, necessary for the construction of the main gas pipeline to Europe. These were American bulldozers "Caterpillar" and Japanese excavators "Hitachi", as well as pipes of large diameter. Our company arranged efficient multinational (US and Japan) financing to cover this procurement. Now we continue our cooperation in this direction. Mitsui through its Russian J/V and distributor "Komek Machinery" LLC, which was established in 2005 as a result of strategic alliance conclusion between Mitsui and Austrian IKO Holding AG, keeps on supplying construction machinery (Komatsu) and providing necessary service and maintenance for Gazprom's subsidiaries and contractors.

– Mitsui cooperated with Gazprom on the "Blue Stream" project. In what forms was the cooperation executed?

– In 1999, we formed a consortium with partners and executed an EPC contract with Transco (a joint venture between Gazprom and Snam) for the "Blue Stream Project", (engineering, procurement, construction), including 750 km off-shore pipeline and compressor stations. Mitsui arranged a comprehensive international finance package for the "Blue Stream Project" with the participation of several ECAs and commercial banks as a lead arranger. In form it was an export financing, secured by the contract for the export of gas. We also arranged the procurement of Japanese pipes for the gas pipeline.

– What is your estimation of cooperation with Gazprom on the "Sakhalin-2" project? What do you think about the prospects of this project?

– Let me start from saying that we paid our attention to the project starting from the second half of 80's, when Lunskoye (mainly gas) field was found on Sakhalin. At that time from 1985 to 1990's, Japanese economy suffered boom and there was a sharp demand for ecologically clean fuel for electric power stations. Japan then bought majority of the gas in Middle East, that's why the necessity for procurement diversification appeared. Among the present members of consortium Mitsui is the oldest project participant. In regard to cooperation with Gazprom, we highly appreciate its contribution to project acceleration. With the mutual cooperation between Gazprom, Mitsui and the other shareholders, Sakhalin-2 project has successfully launched its first LNG production, which entered into the operational phase in March last year. We believe that Gazprom's in-depth expertise and our long time experiences in this industry should contribute to the stable operation of the project and to the maximization of the project value, which also benefits both to the Russian Federation and Japan.

– How do you evaluate the feasibility of Sakhalin LNG plant's project capacity increase? Is Japan ready to increase the part of Sakhalin gas in its fuel balance?

– We are for sure interested in the plant's capacity increase approximately by one third by launching the third line of LNG production. At present the annual volume of LNG consuming in Japan is around 70 mln tones, among which the part of Sakhalin gas is 6 mln tones, which is around 8%. As you may understand the figure is not so big, that is why Sakhalin gas has all the prospects for its part increase on the Japanese market. Though the total energy consumption in Japan might not increase drastically, however Japan will still remain the biggest LNG market. We also consider that Japan will keep relying on LNG import due to the difficulties to construct new nuclear power plants, and also due to the increasing demand for clean energy resources. Besides this, the demand for LNG will increase in China, India, may be Thailand, and other countries of Asia-Pacific Region, in other words, no doubt that Sakhalin gas will be of great demand in future.

– Has the project of procurement of natural gas from Sakhalin to Hokkaido through the pipeline ever been discussed in Japan?

– This question is interesting and difficult at the same time. The realization of such a project is very problematic, which is stipulated by several factors. First of all, Japan has quite a branchy network for receiving LNG – currently in total 27 LNG terminals are in Japan, which are located on all 4 main islands (Hokkaido, Honsyu, Kyusyu and Shikoku). Secondly, our country has a weakly developed infrastructure of gas transportation through the networks, and the construction of the new gas pipelines will demand payment of sufficient compensations to land owners. Thirdly we will have to pay compensations to fishermen in case of gas pipeline construction through the strait. Besides this, there are several factors, related to the legislation for gas industry as well as the relationship between gas industry and power industry – main gas consumers.

– Is Mitsui dealing with the projects related to nonconventional gas business?

– Yes, we for example, possess production sites for shale gas production on the territory of the USA. Also the group companies of Mitsui, include the company, which developed the technology for gas production from gas hydrate, and we are interested in its further development. Japan has its own reserves of gas hydrate, but they are located deep in the sea, that is why the production is too expensive. By the way, in relation to the issue, I have just remembered the visit of Prime Minister Mr. Putin to Lake Baikal, when he was informed that there is a possibility of sufficient reserve location of natural gas hydrate in the lake. We are ready to share our technologies if any such possibility. And if Gazprom is interested, we are ready to discuss this topic.

– As far as we know, "Mitsui" is interested in the Shtokman project, which is implemented by Gazprom. What is your vision of the form of your participation in this project?

– Gazprom and Mitsui established close partnership in the Sakhalin II project, and based on that Mitsui seek to further strengthen and expand our relationship with Gazprom.　We envisage our participation as an equity partner who is ready to share risks, contribute to and bring added value to the project, based on our profound experiences in various LNG projects.

– What share in the project is of interest to your company?

– The question here is not, what share we would like to get, but what role we will play in the project. If we are able to come to an agreement with Gazprom, our appropriate suggestion in regard to project financing we've already sent, we would be interested in supplying gas to the countries of West and North Europe (moreover we have an access to the capacities of terminal, which receives LNG in France).

– What is your estimation of Shtokman project prospects, keeping in mind so called "shale" boom in the USA?

– In fact due to the shale boom the demand for LNG in the USA decreased, to say more precisely, not increased for the time being. But from our point of you, there is a quite perspective West-European market.

– Gazprom started negotiations with Japanese companies, as well as with "Mitsui", concerning building of gas processing and gas-chemistry complexes in the Far East. What do you think about the prospects of these projects? What can your company propose in the frames of these projects' implementation?

– We believe that a gas processing and gas chemistry complex in the Far East, if constructed, has the potential to become a leading supply centre for the Asia Pacific markets, along with LNG facilities on Sakhalin. Japan, no doubt, will see such complexes as attractive sources of energy supply, and therefore we see mutual interests for Gazprom and Mitsui in the development of gas fields in the Eastern Siberia and the gas processing industry in the Far East. Mitsui, along with its affiliates and Japanese partners, has reliable technology and experience to offer in this field, and we believe that we can contribute to an integrated development from the upstream to the downstream. In this context we would like to propose to our Russian partners the most sufficient projects.
For example, last year Mitsui has submitted, to Gazprom, a preliminary master plan for such gas field developments focused on the Chayanda gas field, which envisaged the use of 10 bln cubic meters of gas. After the presentation, the management of Gazprom suggested we revise the volumes up to 38 bln cubic meters, and also made questions in regard to what should be done with helium, which is contained in this gas. In the nearest future we believe to start the preparations of detailed Master Plan, which should include all detailed aspects, related to East-Siberian gas production and its use.

– What other, in your opinion, promising projects could be implemented by your company together with Gazprom?

– Gazprom and Mitsui together have successfully completed the Sakhalin-2 project. According to the signed between this project shareholders the Area of Mutual Interest Agreement our company has already expressed its willingness for the possible joint development of the other blocks in the Sakhalin offshore. We also know that the work for utilization of associated oil gas is actively being done in Russia now, and we have an idea to discuss the construction of processing facilities for methanol or ammonia production aiming at its procurement for export, in case we have access to those regions, where associated gas is produced.
We also would like to introduce EnerSea's CNG (Compressed Natural Gas) ocean transportation technology to Gazprom. We believe this new technology may open the window for Gazprom to access not only to the large scale customer of LNG but also to the small scale customer not economical to build expensive LNG facility.
Besides this we have information that "Gazprom" is now actively developing power generation field. We are also interested in this sphere, and in West Europe for example, we have energy assets with total capacity of 6000mW. Now, along with Gazprom, we intend to realize the project of auxiliary electric power station construction in Astrakhan district. We are ready to participate in this project financing and expect the work in this direction to start next year.
We hope that trust-based relations, established with "Gazprom" during Sakhalin-2 project realization will become the base for the new opportunities for cooperation either on the territory of the Russian Federation or abroad. Though, in my opinion, Russia is the best place for work.