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Reuters: UPDATE 2-India’s ONGC in talks to liquefy Sakhalin-1

Fri Jul 21, 2006

(Adds fresh quote, details and background)

By Unni Krishnan

NEW DELHI, July 21 (Reuters) – Flagship Indian energy firm Oil and Natural Gas Corp. (ONGC) is in talks over exporting its share of natural gas from Russia’s Sakhalin-1 via Royal Dutch Shell’s nearby LNG terminal, an oil ministry official said on Friday.

The move to make liquefied natural gas (LNG) at Sakhalin-1, a multi-billion dollar project on Russia’s Pacific Coast, runs counter to operator Exxon Mobil Corp.’s long-held plan to sell the gas via a pipeline to nearby Japan.

“We are keen on getting LNG from Sakhalin-1,” the ministry official, who did not wish to be identified, told Reuters.

“India needs LNG desperately. Shell has a liquefaction facility for Sakhalin-2 and we can use that. We have had some discussions and will meet them again on July 31.”

Shell has committed almost all of its 9.6 million tonnes per year (tpy) LNG capacity at its $20 billion Sakhalin-2 project to Japan, South Korea and Mexico, with exports due to begin in 2008.

Officials have said it could expand the development by 5 to 10 percent quickly through debottlenecking, but it has put off any consideration of a major expansion until 2013.

Sakhalin-1 has already begun producing crude and will start exports soon, but has not yet set a target for tapping its 485 billion cubic metres of gas reserves, enough to supply India for 13 years at current usage rates, figures from the BP Statistical Review show.

It has sold small volumes of gas to Russian consumers and is still looking at options for pipeline gas. Russian media reports have said gas monopoly Gazprom wanted to buy all the gas from Sakhalin-1 for re-export to China and Korea.

ONGC holds a 20 percent share through its overseas investment arm ONGC Videsh Ltd. (OVL) in the project. Exxon Mobil has a 30 percent stake, while a Japanese consortium of traders and energy firms called Sodeco has another 30 percent. Russian state oil giant Rosneft holds the remainder.

It was not clear whether ONGC, a state firm tasked with finding overseas oil and gas resources to help fuel Asia’s third-largest economy, would be able to divert its share of Sakhalin natural gas if the operator chose another route.

Normally natural gas sales are agreed by the whole group, although oilfield exports are split by equity share.

A spokesman for ONGC, India’s most valuable firm, declined to comment on the talks.

GAS BOOST

India is anxious to increase its use of natural gas, cleaner than domestic coal and cheaper than imported oil, but potential buyers in the power and fertiliser sectors — now reliant on naphtha — have balked at paying soaring international LNG prices.

India has the potential to consume twice as much natural gas as it does now, but domestic production is limited and it has only two operating LNG terminals for imports. Plans for pipelines from Iran, Turkmenistan and Myanmar have yet to take off.

The ministry official said ONGC was pushing the LNG option as it felt a dedicated pipeline to China or Japan would not ensure it the best price for gas produced from Sakhalin. LNG, natural gas super-cooled to a liquid state for tanker transport, would ensure the gas is bought by the highest bidder.

“Piping the gas and selling it means just one consumer and we may not get the right price,” the official told Reuters.

Exxon’s attempts to pre-sell gas to Japan by pipeline have so far failed as the world’s biggest LNG buyer prefers more flexibility in shipments and price. Some potential customers voiced support for a liquefied Sakhalin-1 gas.

“(Sakhalin-1 LNG) could be a good option on a medium- and long-term basis,” said a spokesman for Tokyo Electric Power Co. (TEPCO) <9501.T>, Japan’s biggest utility.

“However, we have not heard about LNG plans from operator Exxon, although we regularly exchange information about the project.”

A spokesman for Osaka Gas <9532.T> said: “Sakhalin-1 could be a good option because 2 is almost sold out. In any case, it seems a long time before Sakhalin-1 decides on their gas business.”

India, which began importing LNG from Qatar in 2004, has balked at paying higher prices for new supplies, leaving one of its two import terminals — run by Shell — largely idle. A deal to secure long-term supplies with Iran has stalled.

While spot LNG prices have fallen lately, many analysts expect they will remain high — together with oil — for years to come, a fact that the world’s second most-populous nation will have to face as it seeks to secure more foreign fuel.

“Dabhol needs gas. Most fertiliser plants are shifting to gas and we have to ensure we give them the supply they want,” the official said, referring to the troubled Dabhol power plant in the western Indian state of Maharashtra. (Additional reporting by Ikuko Kao in Tokyo)
 
© Reuters 2006. All rights reserved.

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