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International relations

Japan eyes support for Russia LNG project amid territorial talks

Tokyo hopeful economic cooperation will lead to results but history suggests otherwise

Novatek expects an Arctic project to begin producing 20 million tons of LNG annually around 2023. (Photo by Tomoyo Ogawa)

TOKYO -- Novatek, a leading gas company in Russia, has asked major Japanese trading houses Mitsubishi Corp. and Mitsui & Co. to invest in an Arctic liquefied natural gas project expected to cost 3 trillion yen to 4 trillion yen ($27.1 billion to $36.1 billion).

The Japanese government is considering financially backing the project. Prime Minister Shinzo Abe thinks promoting economic cooperation with Russia will bolster Japan's negotiating position in talks with Moscow on the return of four Russian-held islands north of Hokkaido.

If the companies agree to participate, they would be asked to foot 10% of the cost. But Japan's government could decide to tap state funds to pay for half of what Novatek is requesting. The fate of any deal, however, hinges on what Mitsubishi and Mitsui decide.

Novatek plans to build an LNG terminal in northern Russia, within the Arctic Circle. The project will start as early as 2020, and the field is expected to begin producing 20 million tons of LNG annually in 2022 or 2023.

The company initially estimated the cost at 2.8 trillion yen.

Novatek plans to take 60% of the project. French oil major Total is on board for 10%. The Russian company is believed also to be asking Saudi and Chinese companies to buy the remainder.

Novatek has intensified efforts to persuade Mitsubishi and Mitsui to finalize deals by spring. Russian President Vladimir Putin nudged Abe on the matter when the two men met in January, a Japanese government official said. Moscow is offering tax incentives and other preferential treatment to the companies, the official said.

The project not only would help diversify Japan's LNG supply, but also further the eight-point Japan-Russia economic cooperation plan that Abe proposed to Putin in 2016. Tokyo hopes this will advance negotiations toward resolving the two countries' long-running dispute over the four southern Kuril Islands.

This strategy has not proved successful in the past. Mitsui and Mitsubishi are involved in the Russian Sakhalin-2 oil and gas project, which began shipping LNG in 2009. But that participation did nothing to help resolve the territorial dispute, and the companies involved were eventually forced to hand over majority control to Russian state-owned energy giant Gazprom after environmental inspectors threatened to halt development.

The U.S. and the European Union also could object to Japanese involvement in the Novatek project. Tokyo, Washington and Brussels have all imposed sanctions on Russia over its annexation of Crimea from Ukraine. Though Japan believes that supporting the LNG project would not undermine those measures, its partners may disagree.

Mitsui and Mitsubishi ultimately may decide the project fails to make financial sense. Shipping resources through the Arctic Ocean would take less time and fuel than current routes through the Panama and Suez canals, and joining Novatek's project would give Japan a presence in an area where China has forged ahead. But the cost may be too high for the trading houses to justify from a business perspective.

"Right now, it's impossible to tell whether the project would be profitable," said Kunihiko Miyake, research director at the Canon Institute for Global Studies. "The government should respect the decisions of the private sector."

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