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Sakhalin II to spend $1.17 bln in 2007

The supervisory board of the Sakhalin II energy project has endorsed its work plan and set its 2007 budget at $1.17 billion. The sum, however, may increase if officials agree to increase total cost to $20 billion early next year.

The 2007 budget will be spent on the construction of an LNG plant, pipelines and an onshore facility, said Igor Ignatyev, spokesman for the project's operator, Sakhalin Energy.

In 2005, the company applied to increase its operational plan until 2014 from $10 billion to $20 billion. If the cost hike is endorsed and the comprehensive plan amended, next year's budget will be adjusted as well, he said.

The endorsed budget is just a guideline, because actual spending of PSA operators is always higher, said a spokesman for Zarubezhneft, a company responsible for all PSA projects.

Last year, Sakhalin II's cost overruns were 61% ($4.05 billion). This year, its actual spending will be $4.1 billion instead of the endorsed $2 billion, he said.

Gazprom's possible participation in the project will not influence cost approval, said Sofia Malyavina of the Russian Industry and Energy Ministry.

Yesterday, a spokesman for Shell, the main shareholder in Sakhalin Energy, Alf D'Souza, said the deal with Gazprom could be struck this week.

The state-controlled gas giant could receive a 50% stake in the project instead of the previously planned 25%. Shell will reduce its holding to 25% plus one share, and Japan's Mitsui and Mitsubishi to 15% and 10%, respectively.

However, a Gazprom manager said the talks will continue because the parties could not agree on a price. Expert estimates of a 50% stake in Sakhalin II vary between $3.5 billion and $10 billion.

The parties have also failed to agree on a scheme for LNG sales to end consumers, a source familiar with the progress of the talks said. Shell wants to buy part of Gazprom's LNG to sell it under an earlier signed contract. Gazprom and Shell spokesmen did not confirm the information.

Almost 100% of LNG to be produced under the project is already contracted for delivery to the United States, Japan and South Korea.

Joining the project, Gazprom will accept its financing risks. The gas monopoly needs long-term contracts to get direct access to the world's largest LNG consumers, Korea and Japan, said Andrei Gromadin of MDM Bank.

© Vedomosti, a Russian newspaper

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