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. Last Updated: 07/27/2016

Shell Sees Sakhalin LNG Deals by Year End

A Shell-led group said Thursday it still planned to build the world's largest liquefied natural gas plant on Sakhalin Island in 2006, despite missing a self-imposed June deadline to find clients.

The Sakhalin-2 group, the biggest of Russia's few production-sharing projects with foreign investment, said the world of LNG was evolving daily, but it was still confident long-term deals for LNG from its plant could be signed before the end of 2002.

"When the project started about 10 years ago the world of LNG was very straight and obvious, with several long-term sellers and buyers," said Yelena Zolotaryova, the head of the Moscow office of Sakhalin Energy. "Today the logic of this business is moving closer to crude oil with smaller volumes and terms. However, we firmly expect letters of intent with consumers by the end of 2002."

Zolotaryova said her confidence was based on a number of factors, including a steady global demand growth for LNG and positive signals from some of the biggest potential consumers in Japan, South Korea, Taiwan, coastal China and the United States.

"Sakhalin still remains one of the best LNG projects for those consumers in terms of geography, flexibility and diversity of supplies," she said.

Sakhalin will have lower shipping costs as it is situated only 1,785 kilometers from Tokyo compared with 12,000 kilometers that separates Japan's capital from Qatar's Ras Laffan or 6,800 kilometers from Australia's Withnell Bay.

Sakhalin Energy is the operator of the Sakhalin-2 project, which unites Royal Dutch Shell, with 55 percent, Japan's Mitsui & Co and Mitsubishi Corp., with 25 percent and 20 percent, respectively.

The plant will cost about $2 billion and produce up to 9.6 million tons of LNG a year. Zolotaryova said the group wanted by the end of 2002 to find long-term consumers for a large part of the 4.8 million-ton-per-year output -- the expected capacity of the plant's first section.

Sakhalin-2 already produces oil from an offshore platform, and the LNG plant will be only a part of its overall spending on the entire project of $11 billion.

This includes two more platforms, an onshore processing facility, an oil terminal and two pipelines, which will cross almost the entire 1,000-kilometer length of Sakhalin.

"We are not exactly tearing our hair out because of the lack of long-term LNG deals so far. More important is that we continue to work toward a schedule of planned first LNG supplies by the end of 2006," Zolotaryova said.

She said Sakhalin-2 shareholders were not underestimating competition in the Asia-Pacific LNG markets. Existing rivals include resource-rich and low-cost Qatar, Oman, Malaysia and Australia. Indonesia's planned Tangguh plant is seen as a major potential competitor to Sakhalin. The Asia-Pacific region is set to remain the most important LNG market in the world, consuming roughly 60 percent of global LNG production.

Zolotaryova said Sakhalin-2 was awaiting new Taiwanese and Chinese tenders on LNG supplies and studying other future markets such as the United States.

"There is a developing LNG market on the U.S. West Coast and Sakhalin is again one of the geographically closest projects to it," she said.