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Royal Dutch Shell Plc .com: Shell May Sell Remaining Sakhalin Gas in Asia, Chadwick Says

From BLOOMBERG

June 27 (Bloomberg) — Royal Dutch Shell Plc, the world’s third-largest oil company, may sell the remaining liquefied natural gas from its Russian Sakhalin-2 project to buyers in Asia, said John Chadwick, Shell’s top gas executive in Asia.

Sakhalin, located close to Japan in Russia’s Far East, now has 90 percent of its LNG under contract and will soon sign agreements for the remaining 10 percent, Chadwick, 49, said in a June 22 interview. Shell last month agreed to sell as much as 420,000 metric tons of LNG a year to Tohoku Electric Power.

“We’re close to finalizing the contracts” for the remaining LNG, said Chadwick, executive vice president for Shell Gas & Power in Asia. “The volumes will remain in Asia.”

The final gas sales, negotiated as rising oil prices and gas project delays have boosted Asia LNG prices, may help compensate for the project’s spiraling costs. Developing Sakhalin, which is ice-bound for almost half the year, will cost $20 billion, more than double the original estimates because of rising material prices and higher contractor fees.

“The main thing is to recover the maximum amount of revenue, particularly in that project, which was so spectacularly over-budget,” said Arthur Dixon, former president of LNG marketing at Australia’s North West Shelf venture who’s now an LNG adviser based in Perth, Australia. “The natural market for Sakhalin is in Asia.”

The Sakhalin-2 project will produce 9.6 million tons a year of LNG from two liquefaction units, or trains, when it starts up in the second half of 2008. Shell has marketed most of its LNG to utilities in Japan and a Sempra Energy-owned receiving terminal in Baja California, Mexico.

Expansion Plans

“The project is over 75 percent complete now,” Chadwick said. “We’re very pleased with the marketing progress.”

Shell is developing the project off Russia’s Pacific coast with Mitsubishi Corp. and Mitsui Co., Japan’s largest trading companies. The project has room for a third production line.

“Studies are ongoing for a third train but the priority is the construction of the first two trains,” Chadwick said. “Right now we’re on track both in terms of cost and schedule.”

Shell agreed last year to swap Siberian energy assets with state-owned OAO Gazprom for a 25 percent stake in Sakhalin. Both sides continue to examine the offer, which became more complicated after Shell revised its costs.

Gazprom said this month that their review may not finish until August. Shell’s review is continuing though Chadwick couldn’t comment on when it would be finished.

Browse Basin

Shell will start drilling before the end of the year the first of 12 exploration wells on a field in the Browse basin offshore Western Australia, Chadwick said. The company won the bid for the field, WA-371-P, in January. The field is near the Ichthys field where Inpex Holdings Ltd. plans on developing a $6 billion LNG export terminal.

The WA-371-P is the only field that Shell is operating in Australia, he said. Previously, the company limited exploration projects to its 34 percent holding in Woodside Petroleum, Australia’s largest oil producer.

“We were very keen on the block,” he said. “We will be opportunists and we will go for those opportunities when they arise.”

Japan and South Korea remain important LNG markets for Shell, which is the largest international oil company supplying gas to both countries, Chadwick said. The two countries will experience growth in their LNG sales, he said.

“Today in Japan only 13 percent of the energy mix is gas- fired,” Chadwick said. “I see tremendous upside in that.”

To contact the reporter on this story:
Christian Schmollinger in Singapore at
[email protected].

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