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. Last Updated: 07/27/2016

Tokyo Gas First LNG Client for Sakhalin II

TOKYO -- Tokyo Gas said Monday that it has agreed to buy up to 1.1 million tons of liquefied natural gas per year from Russia's giant Sakhalin II field, the first contract for the fledgling LNG project.

Tokyo Gas, Japan's largest city gas firm, also said the agreement would mark Russia's maiden shipment of natural gas to Asia and its first exports of LNG ever. The term of the contract at Sakhalin II, one of the largest gas fields in the world, would be 24 years from April 2007.

Yutaka Kunigo, general manager of the gas resources department at Tokyo Gas, said it would begin by buying a small volume of LNG in the first year of the deal, and gradually increase the purchase volume to 1.1 million tons.

He did not reveal the purchase price for LNG from the field, located off the eastern shore of Sakhalin Island in Russia's Far East but said Tokyo Gas was able to negotiate competitive prices.

"We were able to reach a deal with low prices compared with those of our existing [LNG] contracts," Kunigo told a news conference.

Tokyo Gas said earlier this year that it had been seeking lower LNG prices ever since China negotiated a large price cut from Australia at the conclusion of its first LNG contract last year.

Industry sources said China's LNG purchase contract was estimated to be about 20 percent lower than current LNG supply contracts to Japan, Taiwan and South Korea.

The Sakhalin II project is expected to have total LNG capacity of 9.6 million tons per year when it begins production in late 2006.

The agreement with Tokyo Gas is likely to give impetus to the project, which is being developed by Sakhalin Energy Investment Co., jointly owned by Royal Dutch/Shell, Japanese trading house Mitsui & Co. and Mitsubishi Corp.

The close proximity of the field, located off Japan's northernmost island of Hokkaido, should please Japanese LNG buyers, who are heavily dependent on crude oil supplies from the turbulent Middle East and are actively seeking to diversify their sources of energy.

Royal Dutch/Shell group also welcomed the deal.

"This represents a breakthrough for Sakhalin Energy, for Russia and for Shell," Shell Gas and Power CEO Linda Cook said in a statement.

"We are delighted that Tokyo Gas shares our confidence in Sakhalin Energy's ability to offer a competitive and reliable source of long-term gas supply."

Shell Gas and Power is a unit of the Royal Dutch/Shell group.

Tokyo Gas has said its LNG use, estimated at about 7.74 million tons in the year ended March 31, was expected to climb to 9.32 million tons in 2007 and 2008.

Tokyo Gas also imports LNG from Malaysia, Alaska, Brunei, Australia, Indonesia and Qatar under long-term contracts.

News of the agreement failed to lift shares in Tokyo Gas, which ended the day down 3.13 percent at 371 yen, while the Nikkei average rose 0.85 percent.