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OilandGasEurasia.com: Concerns Arise Over Bridging Supplies if Sakhalin 2 is Delayed

10.12.2007 

Customers of Russia’s Sakhalin 2 liquefaction project are becoming increasingly concerned that the project will not be able to find bridging supplies if the start-up date is delayed, sources close to the project said Dec 6.

Liquefaction projects often buy LNG from other sources to meet contractual commitments to customers if their planned start-up dates are delayed. Such deliveries are called bridging supplies.

The sources told Platts that the first shipments from the Sakhalin 2 project in far eastern Russia could be delayed until the spring of 2009 from the planned startup of December 2008.

Project operator Sakhalin Energy previously said it expected the project to start as scheduled, but on Dec 6 a Moscow spokesman for the company said he could not comment on the start-up date.

Sakhalin Energy has said that 98% of the planned 9.6 million mt/yr of output has been sold under long-term contracts, with 60% going to Japanese customers. Japan is about 900 miles away from the liquefaction plant being completed on Sakhalin Island.

The rest of the supplies are earmarked for South Korea and North America’s West Coast, although some of the North American supplies could likely be diverted to higher-paying markets in Asia.

While long-term LNG contracts to Asian customers typically lack destination flexibility, if commercial deliveries from Sakhalin 2 are delayed Sakhalin Energy might be forced to pay for or procure alternative supplies with “ship-or-pay” contracts, the sources said.

“It might be difficult for Sakhalin Energy to find the alternative fuel in the period,” said one source, referring to the time between the planned start-up and expected delay of the LNG shipments.

In addition to an expected continued liquefaction shortfall through that time, the delay would occur during winter, when Asian customers have peak demand and often snap up any available spot cargoes.

For the Japanese gas and power utilities that are Sakhalin 2 customers, a timely start-up of the project is considered essential to meet their expected demand in the winter of 2008-09.

It is unclear how Sakhalin Energy would respond to its customers if its shipments are delayed as each customer has different contract clauses over supply delays, the sources said.

The Sakhalin Energy spokesman declined to comment on terms of the various contracts with buyers, but said the company is “in a constant contact with the buyers.”

The completion of the project could be hampered by adverse weather conditions in the final stages of construction, Platts reported the week ending November 31. Major construction in the area normally makes more progress during the winter because much of the land is frozen, making it easier to work on it, sources said the week ending November 31.

Concerns are growing that the start of deliveries could be delayed because construction has entered a technically difficult phase, the sources said the week ending November 31.

If the start-up is delayed to 2009, it would be the third delay in the project. In July 2005, Sakhalin Energy announced it would start deliveries in summer of 2008, a delay from previous plans for shipments to start in late 2007. The start-up date was subsequently delayed to late 2008.

The Sakhalin 2 project is based on the Piltun-Astokhskoye oil field and the Lunskoye gas field offshore Sakhalin Island. The liquefaction plant would comprise two 4.8-million-mt/yr trains.

In October, Sakhalin Energy received its second imported LNG for commissioning the plant. The first cargo was received in July. Commissioning is expected to take several months to complete, Sakhalin Energy said.

Russia’s state-owned gas monopoly, Gazprom, took a majority stake of 50% plus 1 share in the project last December, after threatening to shut it down over alleged environmental infractions. Royal Dutch Shell, which previously had a 55% stake, now holds 27.5%, with the remaining stakes owned by Japanese companies Mitsui (12.5%) and Mitsubishi (10%).

The Sakhalin 2 contracts are with:

Tokyo Electric for 1.5 million mt/yr for 22 years beginning at project commencement on a free-on-board basis.

Tokyo Gas for 1.1 million mt/yr starting at project commencement for 24 years on an FOB basis.

Kyushu Electric for 500,000 mt/yr starting in 2009 for 22 years on an ex-ship basis

Toho Gas for a maximum of 500,000 mt/yr for 22 years starting in 2009, but only 60,000 mt/yr during the initial years 2009-2012.

Hiroshima Gas for 210,000 mt/yr for 20 years beginning in 2008 on an FOB basis

Tohoku Electric, a heads of agreement for 420,000 mt/yr beginning in 2010 f or 20 years on an FOB basis, with a lower volume of 120,000-300,000 mt/yr for the first five years.

Chub Electric Power, a heads of agreement for 500,000 mt/yr for 15 years starting April 2011.

Osaka Gas for 200,000 mt/yr.

Shell Eastern Trading for 1.6 million mt/yr to the proposed Energia Costa Azul terminal in Baja California starting from project commencement for 20 years (Shell has access to 50% of the Costa Azul import terminal being built by Sempra in Baja California, Mexico).

South Korea’s Korea Gas for 1.5 million mt/yr beginning January 2008 for 20 years on an FOB basis.

Sakhalin 2 oil output

The project also produces significant quantities of oil. Sakhalin Energy said Wednesday it pumped 1.68 million mt (12.4 million barrels) of crude in the 2007 production season, up 6.3% on the year. The 2007 production season ended November 25, a little earlier than usual, due to severe weather conditions, followed by damage to the mooring buoy.

Sakhalin Energy pumped 11.58 million barrels during the 2006 production season, which ended in the middle of December 2006, down 4% from 2005.

The total output over nine production seasons since the start of Sakhalin 2’s phase-1 operations in 1999 was about 97.3 million barrels, Sakhalin Energy said.

In the 2007 production season, a combined 19 cargoes of Vityaz crude were delivered to Japan, South Korea and the US. The Vityaz complex consists of the Molikpaq production platform, a single anchor leg mooring buoy and the Okha floating storage and offloading unit.

“The cumulative amount for the (royalties) since first production commenced in 1999 has secured the inflow of more than $250 million into the budgets of the Russian federation,” the company said.

Weather conditions currently limit crude production at Vityaz to six months a year. But Sakhalin Energy is completing construction work on a new pipeline to link the production complex with onshore facilities, which would allow year-round crude production.

“The actual start of the year-round production will depend on the works on the onshore part of the pipeline during this winter,” a spokesman said, declining to specify dates.

Under the existing plan, year-round production is scheduled to start early next year, although no date has been specified.

The fields in Sakhalin 2 have estimated combined recoverable reserves of 150 million mt (1.1 billion barrels) of crude and 500 billion cubic meters (17.65 Tcf) of gas.

Source: Platts LNG Daily

http://www.oilandgaseurasia.com/news/p/0/news/1452

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