Japan Govt Eyes East Siberia in Drive to Widen Oil Supplies

TOKYO (Dow Jones Newswires), Feb. 21, 2011

Japan's government plans to drill at least six explorations wells by 2014 in two Eastern Siberia oil-and-gas blocks as part of efforts to diversify its sources of oil and increase the amount of "Japan-flagged" crude the country uses, according to officials.

The Japan Oil, Gas and Metals National Corp. and its Russian partner, Irkutsk Oil Co., expect to spend at least $200 million to drill the wells, on top of the $100 million already spent on initial exploration in the blocks, north of Lake Baikal.

"We are now discussing the budget we need for additional seismic work and drilling to establish the size of the fields," Jogmec's East Siberia Project Director Satoshi Asawa told Dow Jones Newswires.

He and other Jogmec officials played down a recent escalation in the decades-long row between Moscow and Tokyo over sovereignty of a string of islands off northern Japan that were occupied by the Soviet Union at the end of World War Two.

"Japan is a big potential customer for East Siberian oil, and Russia has made a lot of investment in the ESPO pipeline," noted Jogmec's Kenichi Yokoi, team director of the East Siberia Project.

If commercial production goes ahead, Jogmec's share of the oil will be sent to Japan via the Eastern Siberia Pacific Ocean, or ESPO, pipeline stretching from Taishet to Skovorodino on the northern border of China. From there some 300,000 barrels a day of oil is now sent by rail to the Russian Pacific port of Kozmino, and around one-third of this is going to Japan.

The pipeline is due to be extended to the coast by 2013, which could increase ESPO export capacity to as much as 1.3 million barrels a day, including a further 300,000 barrels a day of ESPO crude now going to China through a spur pipeline from Skovorodino.

The Japan-Russia joint venture exploration of the two East Siberian blocks "is a kind of symbol of Japan-Russia cooperation," Asawa said.

Jogmec is a Japan government agency that helps fund foreign energy and metals projects being developed by Japanese companies.

In October last year, Jogmec announced that two initial wells its partner had drilled in the southeastern part of the Severo-Mogdinsky block had indicated there could be 110 million barrels of high-quality light, sweet crude of 33-34 API degrees in that immediate area.

Jogmec, which holds 49% of the venture, said that it and Irkutsk Oil had also made natural gas and condensate discoveries in the nearby Zapadno Yaraktinsky and Bolshetirsky blocks.

Jogmec and Irkutsk Oil plan to drill two more wells in Severo-Mogdinsky this year, and a further two in each of the other two fields.

Assuming the appraisal results showed that commercial production is possible, Jogmec intends after 2014 to transfer its share to Japanese companies, who would then work with Irkutsk Oil to develop the reserves, including building a 250-kilometer pipeline to link up with the main ESPO pipeline.

Its two concession areas lie close to oil fields that have already gone into commercial production.

"Japan imports nearly all of its oil, with nearly 90% of this from the Middle East, so supply diversification is really important for Japan," said Asawa.

Japan has been building up crude volumes from Russia to about 263,600 barrels a day in 2010, or 7.1% of its total crude imports, from 4.4% in 2009.

Transporting East Siberia oil to Japan costs just $0.70 a barrel, compared with $1.40 a barrel for oil from the Middle East, Yokoi noted.

Japan's government wants to increase the amount of Japan-flagged oil it uses to 40% of the total by 2030, from 20% now, Asawa said. He declined to speculate how much commercially exploitable oil might be in Jogmec's two blocks, or how much it could contribute to meeting the target.

The development model for the Russian blocks is a new one for Jogmec--normally it provides funds to Japanese companies, or buys small equity stakes in existing projects.

This time it is shouldering the exploration costs before handing over its stake to Japanese companies, probably via an auction.

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