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. Last Updated: 07/27/2016

Gazprom, Shell Delay Sakhalin LNG Exports

Gazprom-led Sakhalin Energy said Monday that it would complete its liquified natural gas plant in late 2008, in a move effectively delaying supplies to Asia by at least a few months.

The company, which has Shell, Mitsui and Mitsubishi as minority partners, warned that it would delay first exports to customers in Asia and the United States by at least a few months.

Industry sources said the delay, which arose from slow construction work, could be extended to half a year to spring 2009 creating bullish pressures on the LNG market in Asia where customers face peak demand in the winter period.

"We aim to complete the main construction and commence LNG plant startup at the end of 2008. LNG exports are expected to start shortly thereafter," a Sakhalin Energy spokesman said.

The group, which has signed up customers for almost all of its production, had previously pledged to start exports in the third quarter of 2008.

Sakhalin Energy said it was talking to customers but declined to comment on whether it would have to pay fines for delays and if it was seeking bridging supplies.

The development confirms expectations by many analysts that a prolonged battle between Shell, which previously ran the project, and the Kremlin for control over the project last year would lead to delays.

"This is obviously a consequence of the turbulent times Sakhalin Energy has gone through last year," said Valery Nesterov, an analyst at Troika Dialog.

"The group will now have to go through peak demand in the winter season so it will probably have to go on the spot market and pay a premium to insure bridging supplies are available," he added.

Sakhalin Energy has sold over 90 percent of the planned 9.6 million tons per year of LNG production under long-term contracts, with 60 percent going to Japan and the rest supplied to South Korea as well as to North America's west coast.

In September, Sakhalin Energy said it would delay year-round exports of its highly sought light crude to 2008 from the end of 2007, citing delays in pipeline commissioning as the main reason. But it had not changed the LNG timetable.

Industry sources said Monday that the pipelines were still the biggest problem as they run 800 kilometers in parallel down the length of the island to the LNG plant, crossing thousands of small and big rivers.

"Mechanically the plant is nearly there, as Daewoo are 70 percent complete on train two, but commissioning cannot happen yet," said a contractor at the project.

"Cryogenic insulation will not be finished until September 2008, but that does not include the valves," said another source.

Cryogenic insulation is wrapped around the pipes to ensure that the super-cooled gas remains at the correct temperature. Insulation is usually the last application to be completed at an LNG plant before commissioning takes place.