Japan Missing Out.

Shoichi Nakagawa, Japan's trade minister, last week said ExxonMobil had been negotiating with Beijing to build a pipeline to north-eastern China through Russia's Pacific coast. Exxon has always said China was a potential customer but the Sakhalin-I venture has made little secret of the fact that it regards Japan as the most natural and secure market.

Nakagawa's remarks followed a meeting with Raymond, who also met with Japanese Prime Minister Junichiro Koizumi in Tokyo. Analysts said ExxonMobil might be playing up the possibility of selling gas to China as a negotiating tactic. ExxonMobil's talks with Japanese utilities, such as Tokyo Electric Power Co. (Tepco), the world's biggest private utility, have stalled.

The US energy super-giant wants to build a pipeline from Sakhalin to Japan to transport about 6m tons/year of LNG-equivalent gas. But Japan's utilities have virtually no experience with piped gas, nor does Japan have an integrated gas network. Instead, utilities have stuck with LNG and have recently placed big orders for long-term LNG contracts with Sakhalin-II.

The Tokyo government is keen to pipe gas from Sakhalin because it would help a shift to cleaner fuel as a way of meeting its Kyoto Protocol obligations (see Downstream Trends of this week). Nakagawa said the fact that ExxonMobil was negotiating with China did not mean talks with Japan had stopped.

On Nov. 3 the Financial Times quoted a senior Japanese government official as saying: "Exxon has made it clear to us that they are talking to the Chinese. But they are conducting marketing efforts in parallel. It does not mean they are saying No to us".

ExxonMobil negotiations with Japanese utilities have made no progress. Some observers, including rival energy companies, have speculated that ExxonMobil might eventually drop the idea of a pipeline in favour of an LNG project, which would allow it to sell gas to multiple markets.

The FT reported: "In recent written answers to the Financial Times, Exxon said of the suggestion that it might abandon the pipeline" and quoted ExxonMobil as saying: "Our view is that a pipeline is the most economical method to deliver natural gas from the Sakhalin-1 area to potential customers in north-east China, Japan and Russia". With the LNG option or with a pipeline to China, the Sakhalin-I project could cost up to $12 bn to develop and gas production is expected to begin in late 2005.

ExxonMobil on Nov. 2 confirmed it was in talks with China National Petroleum Corp. (CNPC) on potential sales of natural gas from Sakhalin-I. An ExxonMobil executive, however, refused to give any details about the talks. The executive was responding to a report in Japan's Nihon Keizai Shimbun newspaper, which said that if an agreement is sealed between ExxonMobil and Chinese partners, a 1,500-kilometre pipeline to transport the gas from Sakhalin to north-eastern China.

As the pipeline would pass through Russia's Pacific coast, it could also supply the Russian market on the way. The pipeline to China will be completed in 2008.

CNPC, China's largest oil and gas producer and the parent of PetroChina Co. Ltd., is promoting one of 10 LNG receiving/regasification terminals in coastal China proposed in recent month. It does not want to miss out on this business, as its smaller rival CNOOC is leading in two LNG terminal ventures, one under construction in Guandong and one to be built off Shanghai. Sinopec, which has initially a major LNG purchase deal with Iran's NIOC (see Gas Market Trends No. 18), is proposing a terminal in Shandong.