Japan pipes up for gas deal

Just a month after Gazprom made the first weld in the Sakhalin-Khabarovsk-Vladivostok pipeline, it appears that the project lacks funding. In the search for money, Gazprom has turned to Japan.

The Sakhalin-Khabarovsk-Vladivostok pipeline will be the largest gas artery in Russia’s Far East. The first 7 billion cubic metres of gas a year is scheduled for delivery in 2011, but Gazprom is short of cash.

So to meet the deadline it’s asked Japan for a $1 billion loan, and in response Japan has offered to supply pipes instead of cash. Analyst, Aleksandr Nazarov, oil and gas analyst at Metropol, sees upside in the proposal.

“This loan could be good, as it can help save some working capital. This could be a potential improvement in relationship between Russian and Japanese business. Moreover, Gazprom could potentially guarantee some supply contracts with Japan or Korea as part of this loan contract.”

Pipes are the main expense in construction of the pipeline. Russia’s biggest pipemakers such as Severstal, TMK and United Metallurgical Company have already applied for a tender to provide them.

Other Russian pipemakers are also working at less than full capacity and are looking for orders, according to Aleksandr Deineko, Head of the Pipe Industry Development Fund.

“Our attitude to the fact that Japan links this loan with pipes supplies is negative. We are fully capable of satisfying demand both in terms of quantity and quality. Besides, pipe-making plants form single industry-cities in a number of Russian regions. So, if the order goes to Japan, thousands of people will lose their jobs.”

The total cost of the pipeline is $11 billion. Transportation of the pipes from Japan to the Far East may be cheaper, but Japanese pipes are 15-20% more expensive than Russian ones.

A final decision is yet to be made. But some experts believe the question of money is now a priority for Gazprom, and Russian pipemakers may lose their share in this project.