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Shell strikes US$6B deal to ship Russian liquefied gas to North America

Canadian Press: Shell strikes US$6B deal to ship Russian liquefied gas to North America

“The deal is the first that would funnel Russian LNG to the United States, whose demand for natural gas is surging as domestic supply dwindles.”

Thursday, October 14, 2004

MOSCOW (CP) – A consortium led by Royal Dutch/Shell Group that is developing gas reserves off Russia’s Sakhalin Island said Thursday it has struck a $6-billion-US deal to supply liquefied natural gas, or LNG, to energy-hungry North America.

Sakhalin Energy Investment Ltd., operator of the Sakhalin-2 project, said it signed an agreement to ship 37 million tonnes of LNG to a regasification terminal in Mexico.

Shell, which is building the Energia Costa Azul terminal in Baja California with California’s Sempra Energy, is the buyer of the gas.

The deal is the first that would funnel Russian LNG to the United States, whose demand for natural gas is surging as domestic supply dwindles.

“There is considerable enthusiasm in the marketplace for this new source of energy from Sakhalin,” Andrew Calitz, commercial director of Sakhalin Energy, told a conference call.

Under the agreement, Sakhalin Energy, whose partners also include Japan’s Mitsui & Co. Ltd. and Mitsubishi Corp., will eventually send 1.6 million tonnes of LNG, and shipments will begin in 2008.

Sakhalin Energy’s LNG production capacity is set to reach 9.6 million tonnes a year. The agreement with Shell brings annual contracted volumes to 5 million tonnes, mostly to east Asian countries.

Environmentalists assert that Sakhalin Energy’s activities disturb a nearly extinct species of grey whales at their feeding grounds off the shores of the island.

In response, the consortium has commissioned an independent panel to review how effective its measures are in mitigating impact on whales during the project’s second phase.

Sakhalin-2 is one of three projects being developed under production-sharing agreements, or PSAs, in Russia. These agreements provide for stable tax terms over the life of the project, as well as extensive government supervision.

On Tuesday, Calgary-based Petro-Canada (TSX:PCA) signed a memorandum of understanding with Moscow-based gas giant Gazprom to investigate building a $2 billion project to liquefy Russian gas and export the fuel by tanker to North America.

The liquefaction plant, estimated to cost up to $1.5 billion US, is planned for the Russian port city of St. Petersburg, formerly Leningrad. It would be built in conjunction with a $500 million US re-gasification plant planned for Gros Cacouna in northeastern Quebec.

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