Tokyo Electric, Chubu Lobby Exxon to Link With Shell in Russia

July 4 (Bloomberg) -- Tokyo Electric Power Co. and other Japanese buyers of natural gas are lobbying Exxon Mobil Corp. to link up with Royal Dutch Shell Plc to cut costs of the fuel from Russia to Asia's biggest market.
Tokyo Electric, the world's biggest buyer of liquefied natural gas, recently asked Exxon to consider abandoning a plan to pipe gas from Russia to Japan and instead turn the fuel into liquid natural gas, said Hiroyasu Murakashi, a manager at the company. Chubu Electric Power Co. has also asked Exxon to switch to LNG, spokesman Hirotaka Iwase said.
The Japanese companies are calling for an alliance of the gas projects now under way in Russia's Far Eastern Sakhalin region. Combining Exxon-led Sakhalin-1 and Shell-led Sakhalin-2 would reduce costs and prices. Shell last July doubled its estimate for the cost of developing Sakhalin-2 to $20 billion, and Russia's state-run OAO Gazprom is reviewing cost overruns.
``Gas from Sakhalin is cheaper than from Indonesia, Malaysia or Australia,'' said Murakashi, who is in charge of buying gas for Tokyo Electric's power stations. ``If Exxon and Shell cooperate and use the same facilities, production costs will go down and benefit all of us.''
LNG is natural gas that has been cooled for transport by ship. Import terminals return the LNG to gas form so that it can be sent through pipelines to customers such as factories, power stations and households.
Sakhalin-1 has made little progress in its plan to deliver natural gas to Japan through pipelines. The project is 15 percent financed by the Japanese government, with Itochu Corp., Marubeni Corp., and the government-run Japan Petroleum Exploration Co. holding together a stake of about 14 percent.
One Option
Tohoku Electric Power Co., Japan's fourth-largest power utility, is talking with Exxon about the situation, said spokesman Naoya Sasazaki, without providing details.
``Buying LNG gas from Sakhalin is one of our options,'' Sasazaki said.
The Sakhalin-2 project agreed in May to sell as much as 420,000 metric tons a year of LNG to Tohoku Electric for 20 years. Tokyo Electric and Tokyo Gas Co. have signed an option contract for unspecified amounts and Chubu Electric and Osaka Gas Co. are considering purchases.
A shift in the Sakhalin-1 project to LNG would make an alliance with Sakhalin-2 a logical step, said Shigeki Matsumoto, an analyst with Nomura Securities Co.
``Japanese energy companies want to diversify their sources,'' Matsumoto said.
Japan's biggest supplier of LNG last year was Indonesia, accounting for about 24 percent of its imports, followed by Malaysia with 23 percent and Australia with 18 percent, according to Ministry of Finance figures.
`Base Case'
Exxon spokesman Robert H. Davis declined to comment on whether the company has talked with Japanese energy companies about supplying natural gas.
``Exxon Mobil does not discuss private business discussions or contacts,'' Davis said in an e-mail. ``Our base case continues to be a pipeline from Sakhalin-1 to North East Asian markets'' while exploring ``all reasonable opportunities.''
Hitoshi Takagi, Tokyo-based general manager of Shell Gas and Power Japan, a Shell unit, declined to comment.
Sakhalin has emerged as a steady source of energy for Japan, which obtained more than 90 percent of its crude oil from the Middle East in 2005. Imports from Iran comprised of 13.8 percent of the country's total oil purchases from overseas. To contact the reporters on this story:
Yoshifumi Takemoto in Tokyo at ytakemoto@bloomberg.net
Last Updated: July 3, 2006 21:15 EDT