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. Last Updated: 07/27/2016

Sakhalin-2 Posts Unexpected 2009 Profit

Gazprom and Royal Dutch Shell’s Sakhalin-2 venture posted an unexpected profit last year after oil and liquefied natural gas shipments beat targets to offset losses from a delay in the project.

Sakhalin Energy, operator of Russia’s only LNG plant, had net income of $582 million, compared with an expected loss of $870 million, according to a company presentation to investors.

The partners had estimated a loss because a delay in the start of LNG output forced them to compensate customers for contracted volumes, two people familiar with the results said, declining to be identified in line with company policy. The venture, based in Sakhalin's capital of Yuzhno-Sakhalinsk, does not report financial results.

Sakhalin Energy loaded the first commercial LNG cargo in March 2009, a delay from a planned start in the second half of 2008. A total of 81 cargoes of LNG and 59 cargoes of oil were loaded, beating targets for the year by more than 47 percent and 11 percent, respectively.

The LNG plant has allowed Russia, the holder of the world’s biggest gas reserves, to break into Asia-Pacific markets, with 65 percent of the volume contracted for Japan.

Sales reached $3.6 billion last year, and the venture cut operating expenses to $1.56 billion and capital expenditure to $846 million from a planned $2 billion and $1.14 billion, respectively, according to the presentation.

Gazprom declined to comment on the presentation, as did Ivan Chernyakhovsky, a spokesman at Sakhalin Energy.

Vera Surzhenko, a Shell spokeswoman in Russia, confirmed that the venture posted a profit before interest and after taxes last year. She declined to provide figures or comment on the presentation.

The venture reached operational profitability last year, Shell chief executive Peter Voser told Vedomosti.

The Sakhalin-2 partners had $21.3 billion in capital expenditure from 2001 through 2009, while total costs exceeded $24 billion, according to the presentation.

In 2005, Shell, then-majority owner, said the second phase of the project, which involved year-round crude output and production of LNG, would cost $20 billion, double an original estimate.

The announcement stirred controversy with the government, which will share royalties only after the investment is recouped. The dispute on costs and environmental damage led Shell to agree to cede control of the project to state-run Gazprom in 2006.

Russia in 2007 approved a second stage of investment for Sakhalin-2, allowing the spending of $19.4 billion until 2014. That level refers to costs that can be recovered under the production sharing agreement.

Gazprom controls Sakhalin Energy, and Shell owns 27.5 percent. Mitsui holds 12.5 percent, and Mitsubishi has 10 percent.