USSR AND JAPAN: THE SAKHALIN OIL AND GAS ISSUE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83B00851R000100170010-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 21, 2016
• Document Release Date: October 22, 2008
• Sequence Number: 10
• Publication Date: August 1, 1982
• Content Type: REPORT

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Directorate of _ Secret
Intelligence
USSR and Japan:
The Sakhalin Oil and
Gas Issue
State Dept. review completed
Secret
GI 82-10170
SOV 82-10117
August 1982
Copy 4 41
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Directorate of
Intelligence
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e Office of Soviet Analysis.
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Comments and
addressed to th
queries are welcome and may b
e Chief, Strategic Resources
e
Division, OGI,
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National Intelligence Council.
Secret
GI 82-10170
SOV 82-10117
August 1982
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USSR and Japan:
The Sakhalin Oil and
Gas Issue
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Secret
USSR and Japan:
The Sakhalin Oil and
Gas Issue
Key Judgments Some seven years after the Soviet Union and Japan began a joint effort to
tap the offshore oil and gas reserves of Sakhalin Island, the project is in
trouble, its success marred by:
? Poor planning.
? Delays in obtaining equipment.
? Most significantly, East-West tensions that led the United States
recently to embargo the transfer of some technology critical to the
project.
With the current June-through-October drilling season nearly half over,
tentative exploratory operations for 1982 are just now beginning. The
Soviets and Japanese are falling further behind the original schedule and
are still unsure when significant amounts of oil or gas will start to flow.
Even so, we believe both partners feel compelled to make the project
work-despite continuing delays and US determination to continue the
embargo.
For the Soviets, the Sakhalin effort is second only to the Siberia-Western
Europe gas pipeline in importance as a multinational energy project. Hard
currency is the principal Soviet motivation, although there are also some
side benefits for continuing:
? If the project goes through as planned-and US sanctions threaten
considerable delays-Moscow stands to earn at least $24 billion in hard
currency during the 20-year life of the deal, or roughly one-fourth of the
projected earnings from the Siberia-Western Europe pipeline. Indeed, at
Sakhalin's peak level of production, expected in the mid-to-late 1990s,
earnings could approach $1.4 billion a year.
? As an added bonus, the Soviets view the project as a way of acquiring the
offshore experience, equipment, and technology they need to begin
intensively exploiting the potentially rich hydrocarbon deposits of the
Barents and Kara Seas later in this decade.
? Finally, a successful Sakhalin project would help keep energy supplies in
the Soviet Far East statistically "in the black" in the 1990s.
Information available as of 23 July 1982
has been used in the preparation of this report.
iii Secret
GI 82-10170
SOV 82-10117
August 1982
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For the Japanese, the reasons for continuing the project are rather
straightforward:
? The Japanese have already sunk considerable investment into the project,
much of which would be lost if the project were canceled. By the same to-
ken, Japan stands to gain a supply of gas at discount prices as well as lu-
crative Soviet business for its growing petroleum equipment industry if
the project succeeds.
? For Japan, knowing that it is the only market for Sakhalin natural gas,
participation in the project is an important element to maintaining good
relations with the USSR.
? Dependence on imported energy has made Japan anxious to diversify its
sources of supply, and nearby Sakhalin Island is a natural choice-one
viewed by Tokyo to be at least as reliable as other suppliers.
For all these reasons Tokyo seems determined to proceed with the project
even though Japan could obtain all the liquefied natural gas it will need
from other suppliers.
We believe that the Soviets and Japanese will move ahead with or without
the equipment that is currently being denied by the US sanctions. Rather
than canceling the project, the two countries will probably agree to push
back the target date for initial production, while the Japanese develop
alternative sources of offshore technology. If they succeed, production of
commercial quantities of oil and gas could begin in the mid-to-late 1980s.
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USSR and Japan:
The Sakhalin Oil and
Gas Issue
Motivations of the Partners
The joint Soviet-Japanese venture to tap the offshore
oil resources at Sakhalin Island (figure 1) is similar in
many respects to the Siberia-Western Europe (Ya-
mal) pipeline project. It involves the transfer of tech-
nology and equipment financed through Western (in
this case, Japanese) credits-at below market interest
rates-in exchange for Soviet repayment through the
transfer of energy resources. In addition, the project,
along with the Siberian pipeline deal, is central to
Soviet plans for earning hard currency. Moscow can
expect to get at least $24 billion ' from selling half of
the oil and all of the gas drawn from Sakhalin's
offshore fields over the life of the project-an amount
equal to about one-fourth of the projected earnings
from the Yamal pipeline over the same period. In-
deed, at the peak level of production, expected in the
mid-to-late 1990s, earnings could approach $1.4 bil-
lion a year. If all the oil were sold, the gain to Moscow
could reach nearly $35 billion.
Other advantages will also accrue from the project.
Perhaps most importantly, the Soviets want to acquire
offshore experience, equipment, and technology that
could be extremely useful when they begin intensively
exploiting the potentially rich hydrocarbon deposits of
the Barents and Kara Seas, probably later in this
decade. Soviet personnel are gaining valuable first-
hand experience in ocean floor geophysical surveying
and drilling, data processing, and offshore-reserves
estimating at Sakhalin. They are using the most
modern mobile drilling platforms (figure 2), plan to
deploy fixed production platforms, and had aspira-
tions of using low-profile subsea multiple-well-com-
pletion systems at Sakhalin. The latter two advanced
technologies are specially designed for the type of
severe weather and icepack conditions found off the
Sakhalin coast.
Finally, if successful, the Sakhalin project could help
ensure that petroleum production in the Soviet Far
East continues to grow through the rest of this decade.
Though this region contributes only a small share of
Soviet oil and gas supplies, production during recent
years has begun to stagnate. On the basis of Moscow's
overall energy development strategy, we believe that
the Soviets will try hard to avoid declines in oil
production in any region-particularly at a time when
continued growth in national oil output appears to be
in jeopardy. 25X1
Since the late 1970s, virtually all oil-producing re-
gions outside of western Siberia have been showing
either no growth or declining output: the Soviets have
been able to point to few, if any, successes. Soviet
planners have acknowledged that success, even in a
relatively minor producing region such as the Soviet
Far East, could help reverse the trend and boost25X1
industry morale. 25X1
When Tokyo first joined the project in the mid-1970s
the Japanese had several objectives in mind, including
security of supply. Embassy reporting indicates that
Tokyo still views the project as an opportunity to
further diversify its sources of liquefied natural gas
(LNG). Japan is presently dependent on Indonesia for
45 percent of its natural gas requirements. In addi-
tion, Sakhalin is closer to Japan than Alaska, Austra-
lia, or Malaysia, and does not pose the same risk of
political instability as do Abu Dhabi and Indonesia.
Even without subsidized gas prices, Sakhalin would
provide Japan with LNG at prices lower than those of
many alternative suppliers, since Moscow has demon-
strated a willingness to underprice competitors when-
ever necessary to assure markets for its gas. More-
over, the Soviets view the Japanese as the only outlet
for Sakhalin gas. Japan is well aware of this, and has
stated that the project is an important element in
maintaining stable political relations with the USSR
as well as expanding economic ties. The Soviets have
increasingly looked to Japan as a source of Western
oil production equipment; at least some Japanese
industry officials believe the project will bring them
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Figure 1
Sakhalin Island Offshore Oil and Gas.Deposits
Boundary representation is
not necessarily authoritative.
Soviet Union
La Pcrouse Strait
t
Secret 2
((administered ty
Soviet Union,
claimed by Japan)
North
Pacific
Ocean
0 300 Kilometers
I I I I
0 300 Statute Miles
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preferential prices, 8.4 percent below world levels, to
be guaranteed for the first 10 years of commercial
production. 25X1
Actual work on the project has never matched the
pace projected when the agreement was signed. More-
over, exploratory drilling in Sakhalin's waters has yet
to yield the hoped for results.
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Okha- Type Mobile Drilling Platform
Licensed by Levingston Shipbuilding Company, USA. Ltd. pamphlet.
Designed for hurricane conditions in the Gulf of Mexico and for With National rack and pinion jacking system (National Supply
cold region operations. Company, a division of ARMCO Steel Corporation).
Up to 91.1 meters water depth. Source: Mitsui Ocean Development and Engineering Company,
Progress to Date
By any measure, progress on the Sakhalin project has
been slow. After several years of sporadic discussions
in the early 1970s, the USSR and Japan signed a
general agreement for the joint development of
Sakhalin's offshore petroleum resources in 1975. The
agreement called for SODECO-a consortium of
Japanese petroleum and trading companies and one
US firm, Gulf Oil-to finance the exploration and
development of Sakhalin reserves through credits. In
return, SODECO was to receive Soviet oil and gas at
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Equipment Requirements
Drilling plans for the 1982 season, intended to delin-
eate further the more complex Odoptu structure and
its petroleum reservoirs were shelved temporarily, as a
result of US trade sanctions. In late July the Soviet
press reported the start of operations using the Soviet
drilling rig. Critical drilling and service equipment,
spare parts, and consultant services purchased or
leased by the Japanese at an expense of some $2
million are currently unavailable because of the em-
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Iq
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Liquefied Natural Gas Plant of Japanese Design
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Japanese Gas Requirements
On the basis of Japanese estimates, demand for
natural gas in Japan is likely to grow more rapidly
than the demand for any other major fuel in the
1980s. Gas requirements, however, will be substan-
tially less than the Japanese were expecting when the
Sakhalin project was signed in the mid-1970s. Indeed,
projected 1990 requirements have already been sharp-
ly pared.
Government projections of gas demand submitted to
the International Energy Agency were reduced by
almost 13 percent between 1977 and 1979. Although
the most recent forecast of 1990 total energy needs, as
approved by the Japanese Cabinet, has been trimmed
by some 15 percent, projected natural gas consump-
tion in 1990 is actually slightly higher than was
forecast last year. We believe it is unlikely, however,
that gas demand will reach the 1.2 million b/doe 25X1
currently projected by Tokyo.
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The Japanese forecasts assume a long-term economic
growth rate of 5.2 percent, significantly higher than
the 3 to 4 percent projected by most private and
academic forecasters. If these private-sector forecasts
prove accurate-as we believe they will-Japan's
actual 1990 gas requirements could be several hun-
dred thousand b/doe below current official Japanese
projections. All things considered, we think that Japa-
nese gas requirements will probably approach 1 mil-
lion b/doe by 1990, roughly 200,000 b/doe below
official forecasts Current consumption is in
the 500,000- to 600,000-b/doe range. Most of the
increase in demand is likely to occur in electric power
generation since the government is encouraging in-
creased use of LNG in this sector.
Supply Options
The growth in gas requirements will have to be
satisfied by increasing LNG imports. Major suppliers
will proboblv include Indonesia, Abu Dhabi, and
Malaysia Potential LNG supplies, including
Sakhalin, however, will exceed actual Japanese de-
mand in the early 1990s by more than 20 percent
(200,000 b/doe). In other words, the Japanese could
do without Sakhalin gas and still meet their needs
well into the 1990s (figure 8). Rather than backing off
on Sakhalin, however, the Japanese are working to
delay alternative development projects:
? Tokyo is already dragging its feet regarding a
commitment to Australia's LNG project.
? Qatar's $6 billion LNG project is being delayed
because Japanese importers are unwilling to guar-
antee the lifting of the gas.
Japan has approached the United
States-most recently during talks between Prime
Minister Suzuki and President Reagan at the Ver-
sailles Conference-with the request that the Sakha-
lin project be exempted from the embargo on equip-
ment and technology to the Soviet Union. In our
judgment, the Japanese believe that the project can be
completed without US help but recognize that doing
so will take more time and cost more money.
Looking Ahead
The Soviet-Japanese agreement is already at least two
years behind schedule, and further delays caused by
the continuation of US sanctions now seem likely. The
Soviets have the right under the general agreement to
abrogate the treaty if the Japanese are unable to meet
their drilling obligations. Soviet officials, however,
recently assured Japan of their intention to continue
with the joint venture; Moscow has already agreed
twice to extend the development phase. Abrogation
would remove the USSR's only export market for Far
Eastern gas. In addition, the Soviets would probably
fail to meet goals for Far Eastern energy production
and would lose easy access to the Western offshore
technology needed for future development of the
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Abu Dhabi, presently the only Middle East LNG Indonesia, the world's largest exporter of LNG,
exporter, has discovered additional natural gas re- currently exports about 11 bcm of gas each year to
serves in the Permian Khuff. Although only limited Japan. Construction has already begun on facilities
tests of the formation have been made, geologists which will nearly double Indonesia's LNG export
express optimism that the area will be highly produc- capacity by 1985. Further expansion of LNG exports
tive. LNG exports to Japan from the project could is possible in the early 1990s, if the problems of
surpass 5 billion cubic meters (bcm) a year around removing large quantities of carbon dioxide from the
1990. Abu Dhabi currently exports 3.1 bcm of LNG huge gasileld near Natuna Island can be overcome.
annually to Japan.
Malaysia has sizable natural gas reserves and by the
end of this year will complete construction of the first
section of an LNG terminal at Bintulu, Sarawak, to
export gas to Japan. The project is scheduled to
reach full capacity of 9.0 bcm by 1986.
Qatar's large gas reserves are concentrated in the
Permian Khuff A $6 billion LNG project to supply
Japan with more than 7 bcm of LNG annually,
however, is being delayed because Japanese importers
are unwilling to guarantee the lifting of the gas.
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potentially significant subsea reserves in their north- 1990s. Moreover, Japan has only a limited need for
ern waters. But, in the final analysis, we believe hard Sakhalin natural gas, given the prospects for slower-
currency remains the dominant concern for the than-expected growth in domestic demand and the
Soviets. availability of supplies from other dependable sources.
Despite the fact that Japanese banking and business 25X1
interests have already invested almost $200 million of All this notwithstanding, Tokyo still appears commit-
roughly $235 million in credits extended for explora- ted to the project, probably because of the financial
tion and anticipate a savings through reduced energy equities it has already established at Sakhalin and its
prices, Japan has much less at stake in the project and prospective and potentially lucrative role as a supplier
less to lose by dissolving the general agreement. The of equipment for the Yamal pipeline and other Soviet
project will provide the Japanese with no more than oil and gas development projects. In our judgment, the
1 percent of their projected energy needs for the
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Japanese also appear to believe that they would lose
some face in their dealings with the Soviets were they
to back out of the project at this point.
Continuation of US sanctions on critical technology
could make Japanese participation extremely difficult
and costly. Acceptable alternatives to the sanctioned
equipment and licensing are not, in general, readily
available. Moreover, Japan views the United States as
an important ally, and current trade negotiations with
the United States on other matters are too crucial to
be jeopardized by detected attempts to bypass the
sanctions directly. We expect that, in the near term at
least, Japan will pursue a carefully measured course,
making every effort to keep the project going by
developing alternative supplies of equipment and tech-
nology. Although the Japanese have told US officials
that they will not violate the embargo, we expect the
Japanese to continue to attempt to circumvent it; one 25X1
approach will be to try to purchase used US equip-
ment from third parties.
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Figure 8
Japan: Natural Gas Supply and
Demand Forecast, 1980-20008
? Demand
a Demand forecast based on economic growth projections of 5.2
percent until 1990 and 4.0 percent from 1990 through 2000.
Potential surplus
Qatar
USSR (Sakhalin)
Canada
Australia
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