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UpstreamOnline: Sakhalin 2 will go ahead – with Gazprom

By Upstream staff

Alexander Losyukov, Russia’s ambassador to Japan, said today that Shell’s $20 billion Sakhalin 2 development, which hit new environmental hurdles this week, could start operating early – if Gazprom joined it.

Seeking to quell fears over late-stage objections to the project, which is due to supply large amount of natural gas to Japan from 2008, Losyukov said Sakhalin 2 would move ahead and that he expected Shell to complete talks over selling a stake to state gas giant Gazprom by the end of the year.

He said Gazprom was a state-run company and if a state-run company joined the project it may be able to operate earlier.

Russia did not mean to stop the project, he said. It would be completed and fuel would be delivered to the buyers, he added.

But the natural environment could not be sacrificed, he said.

On Monday, Russia revoked environmental approvals for Sakhalin 2, a move seen by many analysts as a Kremlin effort to grab a bigger slice of the project.

Losyukov, speaking in Russian translated into Japanese, said about half of 60 environmental violations remained unresolved.

Yesterday Gazprom said that talks on a year-old deal to take 25% stake in Sakhalin 2 via an asset swap had stalled for months due to Shell’s cost overruns.

But Reuters reported that Losyukov, speaking through the translator, said a deal may be sealed before the end of the year, with Gazprom taking 20%. It was not immediately clear why the terms of the swap would have changed from last year.

Losyukov reiterated that Russia would respect the production sharing agreement for Sakhalin 2 even though the 10-year-old production sharing agreement was not satisfactory in today’s market environment.

Shell has a 55% stake in the project, while Japan’s Mitsui & Co and Mitsubishi Corporation own a combined stake of 45%.

Sakhalin 2 will have a capacity of 9.6 million tonnes per year of liquefied natural gas and is due to begin exports in 2008. At least half of its output has been earmarked for Japanese buyers.

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