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Planet Ark: Shell in talks with China on Sakhalin gas deal

Planet Ark: Shell in talks with China on Sakhalin gas deal

CHINA: August 30, 2004

SHANGHAI – Energy giant Royal Dutch/Shell is keen to sell liquefied natural gas LNG.L from its Sakhalin project to China, as it vies with rivals such as BP to tap the market’s potentially explosive growth.

But the world’s third-biggest oil group RD.AS SHEL.L will first have to overcome pricing issues and a still tiny market for supplies from the island development off eastern Siberia’s coast.

Shell, the biggest private supplier of LNG with sales of more than eight million tonnes per year, is ramping up efforts to tap a gas market expected to boom in coming years as Beijing inches toward cleaner fuels. Rival BP BP.L is hard on its heels.

Andrew Faulkner, vice president of Shell Gas & Power North Asia, said the Anglo-Dutch major was now in talks with state oil firms.

“To come to a complex commercial agreement, involving a large volume of LNG and hence a large volume of money, will take quite a lot of time,” he told Reuters.

“But given China’s proximity to Sakhalin, I imagine that, ultimately, we should get there,” he said in an interview.

To date, Shell’s $10 billion (5.6 billion pounds) Sakhalin-2 project owned jointly with Mitsui 8031.T and Mitsubishi Corp. 8058.T – has signed up four Japanese firms to take 3.4 million tonnes per year of LNG.

But it has yet to get a single Chinese customer on board.

That’s despite mainland oil firms scrambling to nail down energy supplies to feed a booming economy that has severely stretched resources, and this summer triggered one of the country’s worst power shortages since the 1980s.

Despite its closeness to China, Sakhalin will vie with LNG suppliers in Australia, Indonesia and Iran.

Russia’s plan to send Siberian gas to China and South Korea through a 4,900-km pipeline is also complicating Sakhalin-2’s efforts in China, analysts say. Plus, the most likely Chinese market would be northeastern China – a coal-rich area.

But China would prove a nice catch, with gas demand growth expected to outpace that of neighbours Japan and South Korea – two of the world’s top LNG importers.

Faulkner, a triathlete in his spare time, said Shell’s 9.6-million-tonnes-a-year project would sign up another buyer by the end of the year and fully commit the rest of its capacity by 2006. It is pursuing buyers in Japan, South Korea and the U.S. West Coast, he added.

“From a China perspective, future gas demand is expected to be strong, although LNG demand today is nothing because it imports nothing,” he said. “We have an expectation that by 2012, it (Chinese gas demand) will reach 20 million tonnes and by 2020, 40 million tonnes.”


LNG is gas that has been cooled into liquid form, which can be transported by tanker. On arrival, it is processed back into gas and fed into pipeline networks. Shell hopes its Sakhalin project will capture a quarter of the east Asian market by 2010.

It expects to sell a total of 6 million tpy to Japanese clients.

China, the world’s largest oil consumer after the United States, is spending billions of dollars on pipelines and terminals to boost natural gas use to 8 percent of its energy mix by 2010, from less than 3 percent now.

Both European giants are in other Asian LNG projects too.

BP owns part of a high-profile LNG terminal in southern Guangdong and has secured billion-dollar contracts to supply gas from its giant Tangguh field in Indonesia. Shell is a stakeholder in the Northwest Shelf Gas and ChevronTexaco’s CVX.N Gorgon projects, which have clinched deals to supply more than 6 million tonnes per year to China.

Faulkner said Shell also wants to explore investments in LNG terminals on China’s mainland – despite confusing regulations.

China has said it may build up to nine LNG terminals in the next few years, sparking a race among firms such as PetroChina 0857.HK PTR.N and Sinopec 0386.HK SNP.N 600028.SS to establish a presence in the fledgling market.

To date, one LNG project each in the southern provinces of Guangdong and Fujian have been approved, with CNOOC Group, the parent of Hong Kong and New York-listed CNOOC 0883.HK CEO.N , the leading shareholder in both.

Story by Godwin Chellam


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