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QUESTIONING RUSSIAN MOTIVES ON JAPAN AND AFGHANISTAN

When Russia abstained from voting on the UN Security Council’s extension on the International Security Assistance Force (ISAF) mission in Afghanistan, it raised some eyebrows not only here at the Shingetsu Institute, but also in Russia Studies circles. In particular, I have noted the appearance of an article by Vladimir Socor at the Eurasia Daily Monitor. My own interpretation of Russia’s action focused on UN Ambassador Vitaly Churkin’s clear references to Japan, but Socor believes that Russia was only using Japan as a “pretext.”

Although I don’t fully accept Socor’s analysis, I think that it is important to lay out his basic argument for others to evaluate it for themselves.

According to Socor, Russia’s abstention reflected three basic policy goals:

1) To signal its discomfort with having US military bases in Kyrgyzstan. Moscow wants to tell the US that it regards US military use of Manas Air Base as a temporary measure and not a long-term measure.

2) To drum up “contentious issues” with Washington that can later be traded as chits in some quid pro quo over missile defense or Kosovo or some other issue over which Moscow has deep concern.

3) To block the emergence of Japan as a major military power on the borders of Russia in alliance with the US and Australia.

While I find all of these factors to be plausible to some extent, and don’t deny at least the possibility that they might have played a role in the Russian abstention, I find Socor’s analysis to be a little too skeptical and conspiratorial. Indeed, I wouldn’t be surprised if one of the major reasons that Russia abstained was simply because they were offended by the way that the US diplomats tried to slip in that message into the preamble without taking much account of Russia’s opinion on the matter. In other words, the US diplomats expected that Russia wouldn’t dare raise an objection over the matter, and were shocked to discover that they in fact did.

Is it not also just possible that the Russians didn’t like the way that the US diplomats were trying to manipulate the internal Japanese political process? Doesn’t Russia itself have a lot of sensitivity to these kinds of issues?

THE POTENTIAL IMPACT OF SAKHALIN OIL

As mentioned previously, this weekend I attended the international workshop on “Japan's Silk Road Diplomacy,” which was held at the Hongo Campus of the University of Tokyo. While there I ran into several other Shingetsu members. I had hoped to provide a summary here, but it appears that the organizers intend to produce there own edited volume over the coming months. Also, the papers that were distributed were all clearly marked “Not for Citation,” and so I will respect their wishes.

That said, I will use bits and pieces of what I learned at the workshop for the benefit of the larger Shingetsu membership over the coming weeks. One of the most striking discoveries I made came not from the paper presenters, but from one of the questioners in the audience who works for the Japan Oil, Gas and Metals National Corporation (JOGMEC). As a preface to a question, this man said that Sakhalin oil would reduce Japan’s dependence on Persian Gulf oil from the current rate of close to 90% to about 70% in future years. I had occasionally seen references to Sakhalin oil in the press, but I previously had no idea that it could be that significant.

After the panel ended, I followed up with the JOGMEC man and asked him if I had understood him correctly when he asserted that 20% of Japan’s future oil supplies might come via Russia. He confirmed that this was indeed the case, but then added a lot of qualifications. First of all, the full impact of Sakhalin oil in still many years down the road, perhaps by 2020. He also indicated that the 20% projection was perhaps on the higher end of the possibilities.

Still, it does seem that Japan is about to receive a much larger share of its oil from Russia, and so we should see Japan’s dependence on Persian Gulf oil drop from its current 88-90% levels pretty soon. Obviously, this has potential ramifications for Japanese political policies in the region.

COMMENTARY

1) From Elena Shadrina of Niigata University on September 26, 2007:

I would like to add a little comment on the role that Russia's Sakhalin oil is expected to play in Japan's supply.

The overall estimation in the newsletter is correct. According to the Institute of Energy Economics, Japan (IEEJ), Russian supply may water down Japan's current dependence on Middle Eastern oil to about 70%. However, this is not exclusively due to Sakhalin oil, but also to other huge deposits in Eastern Siberia and the Far Eastern regions (beyond Sakhalin). According to the newly-adopted programs, exploitation of those carbon riches will start in about ten years. So, in the long run, Japan does have a chance to substitute some portion of its oil imports from the Persian Gulf with flows coming from Russia.

Speaking about the near-term perspective, there is a large-scale oil pipeline project which is called the East Siberia Pacific Ocean (ESPO). The pipeline has been under construction from April 2006. It will deliver oil to China in its earliest stage; and at the second stage (from around 2012), it will enable transportation of oil from the sea port in Primorsky Krai to Japan (and some other Pacific Rim countries). Projected annual capacity of the ESPO is 80 million tons. In the first stage (China's trunk line) it will deliver 30 million tons of oil. The rest of 50 million tons will be added when the project enters its second stage.

The ESPO has been deliberated for a long time in regard to the rather strong competition between China and Japan. Initially, even before the amount of reserves was clear, rivalry between the countries began over access to the pipeline. Later, it transformed into a process of negotiations over the terms and conditions (investment, loans, guarantees, etc.) of access.

Although, as noted above, the project is now underway, there are quite a number of issues that remain unclear.

At any rate, Russia is set to strengthen the "Asian vector" of its energy policy. Therefore, estimations of further increases in Russia's involvement in energy cooperation with Asian countries (China, Japan and ROK) appear plausible.

2) From Hossein Ebneyousef of International Petroleum Enterprises on September 27, 2007:

Regarding Japan's dependence on Persian Gulf oil, I would like to submit the following:

Oil production reached its peak of 250,000 bpd earlier this year for phase-I of the Sakhalin development project. Phase-II's production will also reach its peak rate of 180,000 bpd in the near future. There are other phases which collectively will produce more than one million bpd of oil. However, Japan's interest on phase-II has recently been reduced on account of Russia's insistences, and the Chinese are going to be much more involved than the Japanese in future phases of Sakhalin development. As a result only a fraction -- and most probably a small fraction -- of Sakhalin oil will be utilized in Japan. Meanwhile, Sakhalin oil as a percentage of Japan's total imported oil depends on:

a) Japan's future demand for energy

b) The role of hydrocarbons in Japan's future energy mix

c) Availability and affordability of gas imports

d) The successful completion of the first phase of the ESPO project as well-described by Elena Shadrina

e) Russia's decision to implement the second phase of the ESPO project. China, the sole purchaser of oil in the initial phase of the project and a fellow member of the Shanghai Cooperation Organization (SCO), with an unquenchable thirst for oil, will probably maintain a substantial priority to purchase the additional Russian oil. Next in line would be South Korea, which will be given the opportunity would join the pact. Also notable is that both Iran, a traditional exporter of oil to Japan, and India, a growing competitor of Japan for the Persian Gulf oil, have obtained observer status within SCO

f) Japan's success in meeting the equity oil target from its participation in international oil development projects outside the Persian Gulf region. One should note that Japan has really been a late-comer to the Caspian Sea region. Japan's position on Azari oil is small and in many ways dependent on the stability of Turkey and the Middle East as well as the free flow of oil through the Suez Canal and the Red Sea towards Japan. More importantly, recent news on the Kashagan development in Central Asia has been disappointing. Japanese companies have had some success in obtaining certain oil and gas exploration and development rights in Libya -- at a high price I might add. Also in this case, exploration and development success and the safe passage of oil through the Suez Canal and the Red Sea are also the prerequisites for reducing Japan's dependence on oil from the Persian Gulf region. Sudan was also a no-go for Japan

g) The fact of the matter is that unfortunately Japan has had more setbacks in the Persian Gulf region than in any other oil producing region of the world. First in Iran in the 1970s when Japanese companies could not find much oil or in the 1980s when they walked away from the Iran-Japan Petrochemical Project and paid about $900 million in penalties. Then the loss of a concession in the Saudi-Kuwaiti Neutral Zone to Saudi Arabia and another one a few years later to Kuwait. Finally, the most recent setback was the near total loss of the Azadegan project after providing Iran with billions of dollars in advance credit.

In summary, I'm afraid that Japan would find it very difficult to reduce its dependence on Persian Gulf oil, and whatever reduction takes place might be forced upon Japan by the regional producers unable or unwilling to continue business as usual with Japan -- unable because of the growing local and regional demand, insufficient investment, lack of interest to change their long-established closed-door policy in allowing foreign investment in their upstream oil, and in the case of Iran, stringent U.S. economic sanctions and unwillingness due to economic or political reasons.

So, Japan will be forced to pay higher prices for oil like everyone else, spend huge sums of money in Iraq (in addition to the actual investments made over the past several years and the generous multi-billion dollar loan forgiveness), and possibly even pay a premium for the access to Persian Gulf oil.

3) From Jan-Hein Chrisstoffels of the Clingendael International Energy Programme on September 27, 2007:

If I could be allowed to add a further comment on Russia's potential role as a major future oil supplier to Japan:

It is probably wise to be conservative in our estimate of Russia's future role as oil supplier to Japan. Japanese companies are buying crude oil on a spot basis from the Sakhalin I project. When the Sakhalin II project will start producing year round some of this oil production too will find its way to the Japanese market. But Sakhalin oil can only start making a serious impact on Japan's current portfolio of suppliers when projects like Sakhalin-3 and Sakhalin-5 come online. Nobody can today tell for sure when this will be.

As for the East Siberia Oil Pipeline project, a significant number of question marks remain. To throw in just a few examples: Will Transneft, Russia's oil-infrastructure operator, built the second phase from Skovorodino towards Russia's Pacific coast? If so, when will construction start? Can the pipeline be filled to capacity? If so, will it take oil from mature West-Siberian fields in addition to East-Siberian fields which are not yet in the development stage? Will Japanese companies agree to the contract terms for this oil?

It seems to me a bit optimistic to expect construction on the Japan-bound pipeline from Siberia to start as soon as 2012.

Looking at recent events in Japan's energy diplomacy I would suggest that Tokyo for the moment is trying to secure its position as main customer for Middle-Eastern oil suppliers. China's increasing presence in that region has by no means gone unnoticed in Kasumigaseki, nor has it in Marunouchi. Realistically, Japan's oil dependence on this region will remain in the 80-90% range, unless Japan starts to truly enforce plans to improve efficiency in the transportation sector, which is, after all, where most of the oil is consumed.