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Government to distribute Sakhalin I gas

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Russia's Industry and Energy Ministry has officially declared that the government, together with Gazprom, will distribute gas from the Sakhalin I project in the country's Far East.

However, the production-sharing agreement (PSA) on whose terms the project is being implemented leaves it up to U.S. oil major Exxon's subsidiary Exxon Neftegaz, the project operator, to decide on the issue.

A law on gas exports passed recently confirms Gazprom's gas export monopoly, but stipulates that this law does not apply to gas produced through PSA projects. The sector's experts believe that officials will prevent the planned sale of Sakhalin I gas to China, and use it for the gasification of the Khabarovsk Territory instead.

Exxon Neftegaz says an additional 8 billion cubic meters of gas per year may be produced over the volumes specified in the Sakhalin I contracts. No purchaser has yet been named, but possibilities are being examined to build a pipeline from Sakhalin to China or Japan, and to liquefy gas at an LNG plant that is currently under construction within the Sakhalin II project. Until recently, gas supplies to Chinese consumers have appeared the most likely prospect.

This situation does not suit Gazprom, which has already said it is negotiating the purchase of all gas output with Sakhalin I investors. At present, Gazprom is trying to reach agreement on gas supplies to China, and although the talks are not proceeding smoothly, it has promised President Vladimir Putin that it will sign an agreement with China by the end of this year.

Gas sector experts do not think that Sakhalin gas will go to China. "It will either be sold to Gazprom or liquefied at the Sakhalin II facilities," said analyst with the Troika Dialog investment company, Valery Nesterov.

He believes the Russian side "will do everything possible to prevent competition on the Chinese market." The expert stressed that, under the PSA, the company has the right to build a gas export pipeline on its own. However, this will increase the cost of the project and prolong the time it takes to recoup its investment, and the Russian authorities have recently been protesting against rises in cost estimates of PSA projects.

An analyst with the Solid investment company, Denis Borisov, said that the task set for Gazprom was to provide the Russian Far East with gas. "However, the company has no facilities in the region to carry out these plans," the expert said, adding that now Sakhalin, the Khabarovsk Territory, and Primorye needed 7-8 billion cubic meters of gas per year, and by 2020 their gas consumption (according to Rosneft's forecasts) will increase to 20 billion cubic meters per year.

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