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Shell mulls Sakhalin 2 output boost

Financial Times: Shell mulls Sakhalin 2 output boost

“Royal Dutch/Shell is considering plans to expand production capacity at its key Sakhalin 2 project in Russia’s far east two years ahead of schedule after unexpectedly high demand for its liquefied natural gas.”: “The news could provide a welcome boost for the Anglo-Dutch energy group as it looks to recover from the scandal caused by the overbooking of 23 per cent of its oil and gas reserves.”

By Andrew Jack and Stefan Wagstyl in Moscow

4 Oct 04

Royal Dutch/Shell is considering plans to expand production capacity at its key Sakhalin 2 project in Russia’s far east two years ahead of schedule after unexpectedly high demand for its liquefied natural gas.

The news could provide a welcome boost for the Anglo-Dutch energy group as it looks to recover from the scandal caused by the overbooking of 23 per cent of its oil and gas reserves.

The company has been struggling with stagnant production and is planning to spend $45bn in the next three years as it looks to catch up with rivals.

Shell and its two Japanese partners, Mitsui and Mitsubishi, have committed to spending $11bn on the Sakhalin project, including two LNG “trains”, the production facility that changes the gas into liquid. The project has been hit by about $2bn of cost overruns.

But the companies have now approved a feasibility study on the multi-billion dollar costs of building a new gas train to increase output by 50 per cent or an extra 4.8m tonnes a year, according to individuals close to the discussions.

The consortium has signed contracts representing 3.4m tonnes a year, but the Japanese alone are expected ultimately to agree to purchase about 6m tonnes of the existing planned two train capacity of 9.6m tonnes. Separate contracts are expected to be signed imminently for delivery to Mexico and the west coast of the US, and there is strong interest from South Korea, which would take Sakhalin 2 beyond current planned capacity.

Practice with liquefied gas plants elsewhere in the world suggests that constructing a third train is likely to cost an additional 20 per cent of the price of the existing facilities, providing substantial additional returns. Production from Sakhalin is set to begin in late 2007.

News of the possible expansion comes despite fears more generally about the Russian investment climate, and the absence so far in Sakhalin 2 of any domestic partner, either state or privately-controlled, against a background of growing involvement by the state in natural resource projects during President Vladimir Putin’s second term.

South Korean officials are believed to be particularly attracted by Sakhalin 2’s geographical proximity and the ability of the plant to produce more gas in winter, when efficiency is higher. Additional reporting by James Boxell in London

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