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Lloyds List: World's largest LNG project clings to shores of Russian Arctic

World's largest LNG project clings to shores of Russian Arctic


Sakhalin II could export from the middle of 2008, writes Bruce McMichael
Lloyds List; Apr 19, 2006

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Russia's LNG production industry clings to the very edges of the country with the huge Sakhalin II project lying on the eastern seaboard and Shtokman nestling above the Arctic Circle in the north-west close to Norway.

Described as the world's largest LNG project, Sakhalin II is led by Royal Dutch/Shell and hoping to export its first cargo in mid-2008.

Project costs have ballooned to around $20bn with Ian Craig, executive director of the operating company Sakhalin Energy, saying recently: 'I hope we can meet the target, but there's always a risk for further delay.'

Shell holds a majority stake in Sakhalin II, the world's most intensive capital project.

If ongoing, protracted negotiations with Russia's gas monopoly Gazprom are successful, it may take up to 25% of the project in return for Shell's getting a slice of other Gazprom developments. A Gazprom delegation is expected to visit the Sakhalin II project this month.

Gazprom itself is planning new LNG export facilities at Yamal and Shtokman, both in early stages of development, but will not start production until after 2010.

Under the chilly waters of Russia's Barents Sea in the Arctic northwest coast lies the Shtokman gas field, one of the world's biggest offshore gas fields, holding around three trillion cubic metres of reserves. Gas from planned LNG export plants serving the field and exporting through virtually ice-free ports servicing the development are likely to be brisk and are expected to begin shipping to European and US markets in 2010 at the earliest.

Development costs are estimated at $10bn to $25bn with the field producing from around 50 years.

Such projects are progressed despite a sometimes awkward relationship between the politicians in Moscow and industry.

The tense, early 2006 Russia'Ukraine stand-off between Russia and its gas-buying neighbour highlighted the delicate balance between energy supplier and customer. This issue of energy security has not yet been fully addressed.

Domestically, Russia's successful involvement in the international LNG sector is dependant upon the government taxing LNG in such away that further investment is encouraged; match facilities and operating regulations so they comply with international standards and how to act to avoid disrupting the value chain at home or abroad.

Russian shipping companies are also taking note of burgeoning LNG production.

Energy shipping group Sovcomflot is also working with Gazprom on LNG-inspired developments

Sovcomflot president and chief executive Sergey Frank says that a signing earlier this year of a co-operation agreement is a result of 'Sovcomflot's continuing work to expand the scope of its services to Russian clients in the area of energy shipping, and is aimed at further developing co-operation with Gazprom in the LNG sector.'

Russian shipowners have also recognised that the LNG export market offers opportunities with the Sovcomflot'NYK joint venture in LNG shipping has completed a $320m financing for two newbuilding 147,000 cu m LNG carriers under construction at Japan's Mitsubishi Heavy Industries.

The ships, scheduled for delivery by the end of 2007, will shuttle Sakhalin II and its customers.

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