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Bloomberg: Shell Says Cost Increases for LNG Projects Should Start to Ease

By Angela Macdonald-Smith

Sept. 21 (Bloomberg) — Royal Dutch Shell Plc, the world’s biggest non-state producer of liquefied natural gas, said the jump in construction costs that is delaying new supply projects is set to ease as engineering companies expand.

For the first time in at least two years, engineering contractors are starting to seek new work in LNG project design, Linda Cook, executive director, Shell Gas & Power, said today in an interview from Melbourne. Technology advances such as floating LNG plants will also help overcome cost hurdles, she said.

Shell has a record six LNG production units under construction worldwide, including in Nigeria, Qatar and Russia, as it seeks to meet rising demand for cleaner fuels. In Australia it has stakes in the producing North West Shelf venture, the $10 billion-plus Gorgon LNG project, the Sunrise and Browse fields, and this year found gas near Inpex Holdings Inc.’s Ichthys field.

“I do see contractors who are players in the LNG construction and engineering business around the world increasing their own capacity in order to better supply customers like ourselves,” Cook said by telephone. “That makes me hopeful we’ll see at least stabilization in costs going forward if not improvement. Also technology can play a role.”

The Hague-based Shell, Europe’s biggest energy company, faced a doubling of the construction budget for the Sakhalin-2 LNG project in eastern Russia, to about $20 billion, while the Chevron Corp.-led Gorgon project off Australia’s northwest coast is delayed as the partners work to address a jump in costs.

Global consumption of LNG will outpace the 1.6 percent annual gain in energy demand for the next 25 years, according to the Paris-based International Energy Agency. LNG demand is set to more than double by the middle of next decade, Purvin & Gertz Inc., a Houston-based energy consulting firm, said in June.

Gorgon Delays

Cook said she’s “hopeful about progress” at the Gorgon, in which Exxon Mobil Corp. has a stake. Shell earlier this month agreed to sell 1 million metric tons a year of LNG from the project to PetroChina Co. for 20 years, without giving a date for deliveries to start.

“All major projects similar to Gorgon around the world are facing cost pressures,” Cook said. “We have a strong partnership in Gorgon and we’re working together well to address” the cost increases, she said.

Cook declined to prioritize Shell’s several potential LNG projects in Australia, which include an indirect interest in the Pluto venture through its 34 percent stake in Woodside Petroleum Ltd. Australia accounts for at least 10 percent of Shell’s annual exploration budget of $2 billion to $2.5 billion, she said.

`More Important’

“Shell’s been active in Australia for more than 100 years now and it’s always been important to us, but I think now more than ever,” Cook said. “We see a number of opportunities for growth. I hope they all move forward and even more.”

It’s too early to say how Shell may develop its discovery in a permit adjacent to Inpex’s Ichthys field, Cook said.

“It’s quite normal for companies in these positions to explore potential to cooperate in order to have the most efficient development possible,” Cook said. Inpex, which has teamed with Total SA to develop Ichthys, yesterday said the partners will go ahead with the project without Shell.

LNG is natural gas chilled to liquid form, reducing it to one-six-hundredth of its original volume, for transportation by tanker to destinations not connected by pipeline. On arrival it is turned back into gaseous form for delivery by pipeline to users such as power plants, factories and households.

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

Last Updated: September 20, 2007 23:20 EDT

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