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Reuters: Shell's Sakhalin-2 warns of more LNG delays

Mon Feb 13, 2006 5:32 AM GMT
YUZHNO-SAKHALINSK, Russia (Reuters) – Russia's giant Sakhalin-2 natural gas project could face further delays, although it is currently still on track to start up in mid-2008 after a six-month setback, a top executive said on Monday.
Sakhalin-2, led by Royal Dutch Shell (RDSa.L: Quote, Profile, Research), still aims to export the first cargo of liquefied natural gas (LNG) in the summer of 2008, despite Russia's Energy Ministry postponing approval of the project's $20 billion (11.5 billion pound) costs, double initial estimates.
“I'm hoping we can meet the target but there's always a risk for further delay,” said Ian Craig, the chief executive of Sakhalin Energy consortium, which runs the world's largest LNG project. He was speaking to a small group of reporters.
He did not say what aspects of the project could cause further delays. A spokesman said that the previous six-month delay was due to environmental issues and difficulty in getting the necessary infrastructure materials
The comment may unnerve investors and the project's LNG customers. It follows a shock in July when Shell said it had delayed the first LNG shipment from the project from the initial target of end-2007 because the Russian authorities had repeatedly postponed approval of annual capital expenditure plans.
It also said project costs would double to $20 billion.
The most recent hiccup came on Friday when Russia's Energy Ministry said it had postponed approval of the new cost estimate because it needed more time to study it. The work is expected to be completed by June.
A lack of approval usually creates operational uncertainties and slows the implementation of the project.
The ministry said that it was still concerned that the doubling of costs would cut the profitable share of Russian production.
Shell has always denied this, saying costs had risen because of higher steel and other commodities prices, but high oil prices would allow higher profits earlier than planned.
Shell holds 55 percent of Sakhalin-2, which is set to produce up to 9.6 million tonnes of LNG a year.
It is in talks with Russia's gas monopoly Gazprom OAO (GAZP.MM: Quote, Profile, Research) to finalise an asset swap agreement, in which Gazprom may take up to 25 percent of the project. Shell in return may take part of Gazprom's Zapolyarnoye field.
Japan's Mitsui & Co. (8031.T: Quote, Profile, Research) and Mitsubishi Corp. (8058.T: Quote, Profile, Research) hold the remaining shares in Sakhalin-2, with 25 percent and 20 percent respectively.

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