- The Washington Times - Thursday, September 9, 2004

TOKYO — Hostile and prickly neighbors for much of the past century, Japan and Russia are rapidly drawing closer, at least below the surface, propelled in part by Japan’s extreme energy vulnerability in an era of Middle East turbulence.

In one of the strangest legacies of World War II, Russia and Japan have never managed to sign a peace treaty officially ending hostilities that ceased in fact nearly 60 years ago. All that stands in the way are four tiny islands off the coast of northeastern Japan.

Soviet Prime Minister Joseph Stalin seized the islands in 1947 and brutally expelled the 17,000 Japanese living on them, a chapter etched in the Japanese psyche as one of modern’s history’s greatest acts of treachery.

Rich fishing beds aside, the wind-swept and remote southern Kuril Islands are economically and strategically insignificant. But nationalism on both sides of the Sea of Okhotsk has forestalled a face-saving compromise.

Although right-wing thugs keep disturbing the peace in downtown Tokyo with anti-Russian slogans, and the prime minister dutifully shows up at a solemn Return the Northern Territories Day ceremony every February, commercial relations between the erstwhile foes are expanding apace.

The Japan External Trade Organization says dollar-denominated exports from Japan to Russia rose 87.2 percent from 2002 to 2003 and imports increased 28.7 percent.

Japan is the leading investor in the Russian Far East. Most Japanese money has been sunk into the hydrocarbon-rich island of Sakhalin, 25 miles north of the Japanese island of Hokkaido.

A militarized outpost during the Cold War — site of the downing of a Korean Airlines passenger jet that strayed over its southern coast in 1983 — Sakhalin now bustles with foreigners in hard hats and pipeline construction. The Exxon-led Sakhalin I project, in which Japanese firms hold a 30 percent share, aims to tap oil in 2005, with natural gas to follow.

Although countries usually transport natural gas via pipeline, Japan buys most of its gas in liquefied form and transports it in ships. Sakhalin II, led by Royal Dutch Shell and with 45 percent Japanese ownership, has broken ground for the world’s biggest liquefied natural gas plant at Prigorodnye, southern Sakhalin. It is set to start filling liquid natural gas tankers by 2007 that can reach Japan in a few days.

In June, Sakhalin Energy, the Shell-led consortium, signed a sales and purchase agreement with Kyushu Electric, one of four Japanese utilities that will buy a total of 3.1 million tons of natural gas per year.

Observers say that once the bills for infrastructure and support facilities are added up, total investment in Sakhalin, a desolate island of fewer than 1 million residents, could reach $100 billion.

“It is going to be a massive energy boom. I don’t see how it can’t be,” said Jeffrey Valkar, director of the American Business Center in Yuzhno-Sakhalinsk.

“The explored and proven reserves are huge. This could rival Prudhoe Bay in Alaska. As far as unproven reserves go, they are found throughout Sakhalin, even up into the Arctic Circle. So if you put everything together, it could rival some of the Mideast sources.” Sakhalin is “a gas station right on the Pacific Rim,” said William Miller, executive vice president of BP Sakhalin.

In addition to grappling with formidable forces of nature in an arctic-chilled earthquake zone, the oil majors must contend with a country that still is getting accustomed to the rule of law. Sakhalin 3, a third oil field involving a U.S. consortium, was thrown into limbo this year after Russia abolished “production-sharing agreements,” under which it was to receive neither royalties nor taxes from energy sales until the Western companies were compensated first for the costs of exploration, development and production.

The oil majors also have fended off a barrage of attacks from environmentalists, who charge Sakhalin’s metamorphosis from wilderness to gas pump will damage valuable salmon fisheries and destroy wildlife, particularly the migration habitat of the endangered Western Pacific gray whale.

Galina Pavlova, director of the Department of Oil and Gas Complex of Sakhalin Region, said dangers to species such as whales have been “blown way out of proportion,” but acknowledged that Moscow has not made adequate provisions for a full-blown supertanker spill.

Tokyo argues that the energy boom is an anomaly, and that the Northern Territories dispute, along with concern over the risk of Russia as a country, continues to strangle normal commerce. Japan’s two-way trade with Russia, although rising, still pales beside its trade with China.

Japanese officials hold out hope that President Vladimir Putin, enjoying a fresh mandate after the spring’s landslide election and a booming domestic economy, will be willing to discuss the territorial issue directly.

Expected to visit Tokyo early next year for a summit, however, Mr. Putin has said he does not expect any breakthroughs.

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