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Russia, Japan deepen ties with agreements on upstream, LNG cooperation

Moscow — Russian and Japanese companies Friday signed a number of memoranda andagreements on cooperation in hydrocarbons development during the first visitto Japan in 11 years by a Russian president.

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The agreements included joint exploration offshore Sakhalin,technological and financial collaboration in oil, gas and LNG, and establisheda mutual fund for such projects.

The documents -- 23 of them energy-related -- signed in the presence ofPresident Vladimir Putin and Japan's Prime Minister Shinzo Abe, include threeJapanese companies joining Rosneft in hydrocarbons exploration offshoreSakhalin, expanding LNG partnership with Gazprom and Novatek, opening a creditline for Yamal LNG plant and setting up a mutual fund, among other agreements.

With a total of more than 80 projects outlined and signed off, thecollaboration entered a level "unprecedented in the history of Russia-Japanrelations," Abe said in a briefing following the signing ceremony in Tokyo,adding the countries can have "a win-win economic partnership."

With Moscow's turn to Asia in search of investors in light of westernsanctions targeting the country's energy sector among other areas since 2014,Japan has been conspicuously absent from new deals, while companies from Chinaand India signed numerous agreements to enter the Russian upstream.

Ties with Japan have been complicated by a long-lasting territorialdispute over the four Kuril Islands, as well as by Japan joining sanctions,even if in the form of milder restrictions not preventing its companies fromtaking an active role in oil exploration and production in Russia.

The sanctions, as well as volatile commodity prices and resultingcurrency fluctuations, have led to a 28% year-on-year drop in trade turnoverthis year, Putin said, expressing the will to turn the situation around,including through greater energy cooperation.

"Energy is a strategic area of Russia-Japan cooperation," Putin said,noting Russia's "reliable" LNG supplies, in excess of 8% of Japan's needs.

Japan is also one of the top buyers of Russia's ESPO and Sokol crude.

Among key new cooperation areas, Putin noted Rosneft's talks onattracting Japanese investors into oil and gas production in the Sea ofOkhotsk, construction of the second LNG plant in Sakhalin, Far EasternLNG, and exploring the possibility of an "energy bridge" between Russia andJapan, and laying a Sakhalin-Hokkaido gas pipeline.

"The implementation of these large-scale projects will supply Japaneseconsumers with additional LNG and power at affordable prices and at theshortest distances," Putin said.

To help finance these and other projects, Russian Direct Investment Fundand Japan Bank for International Cooperation (JBIC) agreed to set up a $1billion mutual Russia-Japan Investment Fund, each investing half the amount,with first deals expected in the coming year, RDIF said in a statement. ROSNEFT DEAL

Russia's top crude producer Rosneft signed a heads of agreement withthree Japanese companies -- state-owned Japan Oil, Gas and Metals NationalCorporation (Jogmec), Inpex, the country's largest oil and gas exploration andproduction company, and Marubeni -- on hydrocarbons exploration, developmentand production at a license block offshore Russia's Far Eastern SakhalinIsland.

The parties agreed to work in Sakhalin's southwestern offshore areabetween the island, just north of Japan, and mainland Russia.

Rosneft and the three Japanese companies plan to hold exploration in thearea using Shigen seismic vessel and Jogmec's overseas geological andgeophysical survey scheme, the Japanese companies said in a joint statement.

Japan sees the project as a chance to firm economic ties with Russia andits energy security should hydrocarbons be found in the area, they said.

"In the event that hydrocarbons are discovered as a result of explorationin the area, which is in close proximity to Japan, the three Japanesecompanies expect that the project will promote energy security in Japanthrough the resultant benefits of greater diversity of the country's energysources and a short transportation distance," the companies said. The heads of agreement also follows Rosneft's strategy of attractingpartners in capital-intensive offshore projects to accelerate theirdevelopment and split geological risks, Rosneft said in a separate statement.

"The agreement is aimed at effective oil and gas resource monetizationincluding in the prospective Japanese market, and is a logical continuationof the agreements by Russian president and Japan's prime minister tostrengthen and develop Russo-Japanese ties," Rosneft's CEO Igor Sechin said. Rosneft already partners with Japan's Sodeco, which holds a 30% stake inthe Exxon Netegas-led Sakhalin-1 project, where India's ONGC also holds 20%.

Jogmec was previously reported among potential buyers of a 10% stake inRosneft before 19.5% of its state-owned shares were sold to a consortium ofGlencore and Qatar Investment Authority earlier this months.

A year ago Sechin said Rosneft had offered Japan more than a dozenproduction projects from geological exploration to production, includingoffshore Sakhalin and in East Siberia, and invited Japan to consider expandingoil product imports by joining the construction of the Far-East PetrochemicalCompany (FEPCO) and taking part in developing the Far Eastern Zvezda shipyard.

He then called for building an "energy bridge" to enable Russia to supplyJapan with "crude, oil products, LNG and other energy resources in return formachinery and equipment deliveries, and even asset swaps." LNG COOPERATION

Russia's gas giant Gazprom, which leads the Sakhalin-2 consortiumoperating the only producing LNG plant at the moment, noted large potentialfor cooperation in LNG with Japanese companies, including in technology,production and investment, after signing agreements on strategic partnershipin LNG with Mitsui and Mitsubishi, Sakhalin-2 stakeholders, along with Shell. The agreements aim at partnering on the Sakhalin-2 LNG expansion by halfwith the addition of the third train tentatively set for in 2021, as well asLNG bunkering with Mitsui and other opportunities with Mitsubishi, it said.

Gazprom is also considering partnering with Mitsui and Mitsubishi onanother future LNG plant, Baltic LNG, on the Baltic Sea coast, and swappingassets with the two companies "to build mutually beneficial chains andexpanding joint work," Gazprom's CEO Alexei Miller told RT channel later inthe day.

The construction of a gas pipeline to Japan is "technologically not sosimple an issue, but still a realistic one" and may get on the agenda ofRussia-Japan talks in the nearest future, Miller told NTV channel.

Sakhalin-2 has installed capacity of 9.6 million mt/year but produces10.8 million mt/year of LNG, consistently exceeding the capacity since 2012.

JBIC also signed an MOU with Gazprom on general cooperation principles infinancing joint projects with Japanese companies, and opened a Eur200 million($209.4 million) credit line for Russia's next LNG plant, Novatek's 16.5million mt/year Yamal LNG in the Arctic scheduled for a 2017 launch.

Nearly all of Yamal LNG gas has already been contracted, Japan being akey buyer alongside China and India, Novatek's officials said previously.

Novatek also signed MOUs with Mitsui, Mitsubishi, and Marubeni forimplementing LNG projects in Russia and supplying LNG and liquid hydrocarbons,Cooperation with Marubeni will specifically focus on Arctic LNG 2, it said.

"We see the enormous potential of mutually beneficial cooperation withJapanese companies in implementing LNG projects by combining our expertise toensure the most cost competitive LNG production as well as joint developing ofLNG markets," Novatek CEO Leonid Mikhelson said in a statement.

Gazprom's oil arm, Gazprom Neft, also said it signed an agreement withYokogawa Electric Corporation to set up an innovations center in St Petersburgto develop automated control system for refining.

--Nastassia Astrasheuskaya, nastia.astrasheuska@spglobal.com--Edited by Jeremy Lovell, jeremy.lovell@spglobal.com