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. Last Updated: 07/27/2016

$9.6Bln Project to Sell Power to Japan

The wheels have started to creak forward on a lofty $9.6 billion project to send electricity to Japan from the fuel-rich Far East island of Sakhalin, national power giant Unified Energy Systems said Monday.

UES and the Sakhalin regional government have signed a letter of intent to coordinate efforts in building a 4,000-megawatt power station and selling electricity to the northern Japanese island of Hokkaido by 2010, a UES spokesman said.

The project, which UES has trumpeted for years, envisages the construction of the power station and 1,400 kilometers of transmission lines in two phases from 2004 to 2013, he said. The lines, 1,000 kilometers of which would be underwater, would eventually reach beyond Hokkaido to the neighboring island of Honshu.

UES head Anatoly Chubais praised the project at the signing of the protocol Friday, saying Japan is expressing a lot of interest in the plan.

"I have carried out discussions on this question with various high-ranking politicians, large corporations and met with the Japanese prime minister and found an understanding," Prime-Tass quoted Chubais as saying at a news conference.

No Japanese officials took part in the ceremony.

Chubais also cautioned that the project faced a number of hurdles.

"There is no 100-percent guarantee that the project will be successfully realized because carrying it out demands fulfilling tasks not only of a financial and technical nature, but also lobbying on the highest political levels," he said.

Analysts on Monday were even glummer about the project. UES was not likely to come up with the needed $9.6 billion any time soon and would probably miss its targeted deadlines, they said.

"We are quite pessimistic about this project," said Mikhail Seleznev, utilities analyst at United Financial Group. "It is certainly very ambitious, but hardly feasible under the current circumstances."

"In the evaluation of the [utilities] companies, I don't think [the project] should be taken into account," said Kakha Kiknavelidze, utilities analyst with Troika Dialog. "It could be a valid, long-term project, but at this stage it is too early to talk about it."

"Five years ago, people were also talking about exporting electricity to China, but that didn't work out either," he said.

Unabashed, UES says it is eager to push ahead with the project.

Under the pact signed Friday, Sakhalin Governor Igor Farkhutdinov pledged to give tax breaks to the participants and to assist UES in talks with local oil operators Sakhalin 1 and Sakhalin 2, whom the electric company hopes to tap for fuel supplies for the power station.

UES, known for being chronically late in paying for fuel, may face an uphill road persuading oil operators to divert supplies, analysts said.

Sakhalin Energy Investment Co., the Sakhalin 2 consortium that unites oil companies Royal Dutch/Shell and Japan's Mitsui and Mitsubishi, said Monday that it was considering assisting UES.

"Sakhalin 2 considers securing buyers for gas that will be produced by the project as one of its most important marketing objectives," a Sakhalin Energy source said. "Therefore, it cannot be excluded that the company could sell some of its gas to UES."

To implement the project, UES plans to set up a Russian-Japanese joint-stock company by 2002 that will cover 25 percent of its costs. The remaining 75 percent of the financing will be borrowed.

While no investors have come forward yet, UES is seeking 15-year loans with an initial 2.2 percent interest rate that would be increased to 3.2 percent after operations start in 2010.

No Japanese partners have signed up for the project yet either. However, UES said it is in negotiations with Japan Petroleum, Itochu and Marubeni.

The power bridge to Japan is expected to export $1.5 billion worth of electricity a year, or 25 billion-kilowatt hours of the 28 billion-kilowatt hours produced. The remaining electricity would be used to meet the needs of the island, which despite its huge oil and gas reserves faces frequent energy shortages.

UES head of strategy and development Yury Kucherov said the electricity would cost 0.016 cents per kilowatt-hour to generate and 0.032 cents per kilowatt-hour in order to transmit, Interfax reported. The electricity would sell on the Japanese market for 0.06 cents to 0.08 cents per kilowatt hour, a sum that utilities analysts said is similar to what the Japanese already pay for power.

The proposed pricing strategy is worth noting because UES recently signed a deal with a different Western country, Finland, to provide power for some 2 cents per kilowatt-hour, analysts said.

"UES is selling its electricity to Finland at below 2 cents per kilowatt hour, so this price may be based on the long-term costs," said Seleznev at UFG.

"The global tendency right now is for declining electricity tariffs, not comparable ones," he added.

UES signed a 10-year deal to initially export $50 million to $60 million of electricity per annum to Finland earlier this month. Chubais said at the time that UES is eyeing Norway and Sweden as well.

When Royal Dutch/Shell announced plans last month to buy out U.S. firm Marathon Oil Co.'s 37.5 percent stake in Sakhalin 2 so Shell will become the lead operator for Sakhalin 2, Rein Tamboezer, president of Shell Exploration and Production Services, said the deal signaled the project had entered a new phase.

He said the most important part of that phase is to bring the natural gas from the project to the markets in the Far East, and in particular Japan.

That project would move to gas field development and the construction of a liquefied natural gas, or LNG, plant.