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Bloomberg: Shell to Sell LNG From Gorgon Project to PetroChina (Update2)

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The Shell company logo are displayed outside a Shell service station at Abingdon, near Cambridge, July 23, 2007. Photographer: Si Barber/Bloomberg News

By Angela Macdonald-Smith

Sept. 4 (Bloomberg) — Royal Dutch Shell Plc, Europe’s biggest oil company, signed an initial accord to sell liquefied natural gas to PetroChina Co. from the delayed $10 billion-plus Gorgon project in Western Australia.

The accord is for the sale of 1 million metric tons a year of LNG over 20 years to PetroChina, Asia’s biggest oil company by market value, with Gorgon as the main source, Shell’s Australian unit said today in an e-mailed statement. The accord is conditional on the Chevron Corp.-led Gorgon project going ahead.

The Gorgon partners, which include Exxon Mobil Corp., last year dropped a 2006 deadline for approving the 10 million tons- a-year plant for development and haven’t given a revised timetable as they carry out work to improve the project economics. Shell didn’t say when deliveries to PetroChina are due to start.

“This is a good sign from Shell; if they are still talking to the market and they’ve done a deal they must expect that something is going to happen pretty soon,” said Russell Williams, a director at RISC Pty, a resource investment consulting firm in Perth. “Obviously the original schedule is well and truly blown.”

The venture may approve the project for development next year, Tony Hanna, vice president for Asia Pacific at Shell Gas & Power International, said without giving the delivery start date. The venture has increased the planned capacity of the project by 50 percent to 15 million tons a year, he said in an interview at a conference in Singapore.

Mexico, India

San Ramon, California-based Chevron, the second-biggest U.S. oil company, owns half of Gorgon and is the operator, while Shell and Exxon each owns 25 percent. The final cost of the project, which is intended to tap gas from the Gorgon and Jansz fields off the northwestern Australian coast, will probably rival Shell’s Sakhalin-2 in eastern Russia at about $20 billion, Wall Street Access said in a June 26 report.

The proposed sale of Gorgon LNG to PetroChina doesn’t affect initial agreements Shell already has to sell fuel from the Australian project to an LNG import terminal in northwest Mexico and to India, said Anita Harben, a spokeswoman for Shell in Perth. The terms of the accords are “flexible,” allowing all three agreements to proceed, she said.

LNG Imports

PetroChina’s smaller competitor China National Offshore Oil Corp. started China’s first LNG imports last year, buying fuel from the Woodside Petroleum Ltd.-operated North West Shelf venture, also in Western Australia. China, the world’s biggest emitter of greenhouse gases, is increasing use of cleaner- burning fuel such as natural gas to help reduce pollution from burning coal and fuel oil.

China has been buying LNG on the spot market at prices more than double the price it pays to the North West Shelf venture, Chinese customs data show. Shell said today it’s “very pleased” with the terms of the PetroChina accord, indicating it was struck at higher prices than the North West Shelf contract.

“China is finally preparing to enter the global LNG business,” said Fereidun Fesharaki, chief executive officer of Hawaii-based consulting firm FACTS Global Energy Inc. “It gives the signal that they are prepared to pay the price and it’s close to oil-parity price.” The start-up of deliveries from Gorgon is six to seven years away, he said.

The accord was signed in Perth by Chadwick and Sun Longde, vice president of PetroChina, in the presence of Western Australian Premier Alan Carpenter and Ma Kai, chairman of China’s National Development and Reform Commission.

LNG Prices

The PetroChina agreement “sets a new benchmark for LNG supplies into China and underlines Shell’s commitment to Chinese LNG customers and to the Gorgon project,” Jon Chadwick, executive vice president, Shell Gas & Power Asia, said in the statement.

“That suggests to me pricing terms that reflect the current strong market for LNG and the high prices that are being received as a result of sustained high oil prices,” said Paul Balfe, a Brisbane-based director at ACIL Consulting Pty, an economic consulting firm.

Shell won’t directly comment on the terms, Harben said.

“We don’t comment on commercial terms however it is a strong LNG market with growing demand and we’re very pleased with the terms that we’ve agreed,” she said in a telephone interview. “We feel that the deal demonstrates China’s credibility as a serious buyer of LNG and a customer that is willing to secure supplies in a regional and global market.”

Perth-based Woodside, Australia’s second-biggest oil and gas producer, last week declined to confirm or deny a report that its Browse LNG venture in Australia is set later this week to sign an accord to sell LNG to PetroChina. BHP Billiton Ltd., BP Plc, Chevron and Shell have stakes in the Browse project.

LNG is natural gas that’s been chilled to a liquid form, reducing it to one-six-hundredth of its original volume, for transportation by ship to destinations not connected by pipeline. On arrival, it’s turned back into gas for distribution to power plants and other buyers.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at [email protected]

Last Updated: September 3, 2007 22:54 EDT

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