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Shell Looks to Asia for Sakhalin-2 LNG Sales

Royal Dutch Shell, the world's third-largest oil company, might sell the remaining liquefied natural gas from its Sakhalin-2 project to buyers in Asia, said Jon Chadwick, Shell's top gas executive in Asia.

Sakhalin, located close to Japan in the Far East, now has 90 percent of its LNG under contract and will soon sign agreements for the remaining 10 percent, Chadwick, executive vice president for Shell Gas & Power in Asia, said in an interview. Shell last month agreed to sell as much as 420,000 metric tons of LNG per year to Tohoku Electric Power.

"We're close to finalizing the contracts" for the remaining LNG, said Chadwick. "The volumes will remain in Asia."

The final gas sales, negotiated as rising oil prices and gas-project delays have boosted Asia LNG prices, might help compensate for the project's spiraling costs. Developing Sakhalin, which is ice-bound for almost half the year, will cost $20 billion, more than double the original estimates, because of rising material prices and higher contractor fees.

"The main thing is to recover the maximum amount of revenue, particularly in that project, which was so spectacularly over budget," said Arthur Dixon, former president of LNG marketing at Australia's North West Shelf venture who's now an LNG adviser based in Perth, Australia. "The natural market for Sakhalin is in Asia."

The Sakhalin-2 project will produce 9.6 million tons per year of LNG from two liquefaction units, or trains, when it starts up in the second half of 2008. Shell has marketed most of its LNG to utilities in Japan and a Sempra Energy-owned receiving terminal in Baja California, Mexico.

"The project is over 75 percent complete now," Chadwick said. "We're very pleased with the marketing progress."

Shell is developing the project off Russia's Pacific coast with Mitsubishi and Mitsui, Japan's largest trading companies. The project has room for a third production line.

"Studies are ongoing for a third train but the priority is the construction of the first two trains," Chadwick said.

"Right now we're on track both in terms of cost and schedule."

Shell agreed last year to swap Siberian energy assets with state-owned Gazprom for a 25 percent stake in Sakhalin. Both sides continue to examine the offer, which became more complicated after Shell revised its costs.

Gazprom said this month that its review might not finish until August. Shell's review is continuing, though Chadwick could not comment on when it would be finished.

Asian LNG buyers may face supply difficulties this decade because of delays in projects, said Jane Liao, head of LNG purchasing for China Petroleum Corporation, at an industry conference on June 20. Sakhalin-2, BP's Tangguh project in Indonesia and Chevron's Gorgon project in Australia are all running behind schedule.

Japan and South Korea remain important LNG markets for Shell, which is the largest international oil company supplying gas to both countries, Chadwick said. The two countries will experience growth in their LNG sales, he said.

"Today in Japan only 13 percent of the energy mix is gas-fired,'' Chadwick said. "I see tremendous upside in that."
© Bloomberg

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