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Shell takes first LNG delivery from Sakhalin-2

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By Ed Crooks

Published: April 1 2009 03:32 | Last updated: April 1 2009 03:32

Sakhalin-2, the $20bn gas and oil development off the far eastern coast of Russia, was still a financially sound project even after the state wrested control from Royal Dutch Shell in 2006, its chief executive said.

The first cargo of liquefied natural gas from Sakhalin-2 is expected to be delivered to Tokyo on Wednesday. It will be a bittersweet moment for Shell, which was forced to cut its 55 per cent shareholding down to 27.5 per cent to allow Gazprom, the state-controlled Russian gas company, to take a 50 per cent stake.

The project is coming on stream as gas demand is falling worldwide, including in Sakhalin-2’s target markets of Japan, South Korea and the US, and there are large volumes of extra LNG coming on to the market, particularly from Qatar.

Some Asian customers were choosing to use flexibility in their contracts to delay deliveries by a year or two but the group still expects to reach full production early next year.

Ian Craig, chief executive of the Sakhalin Energy Investment Company that runs the project, said its economics were still “pretty sound”, even after the change of ownership and the huge cost overrun that helped provoke the Russian government into action.

The cost of the project doubled from its original budget of $10bn (£7bn) but it has not risen again since the latest revision in 2005.

Mr Craig suggested that, with an estimated 4bn barrels equivalent of oil and gas of ultimately recoverable resources, the investment should be worthwhile, even at an oil price around today’s $50 a barrel.

Gazprom had paid the other shareholders the value of their investments when it had joined the project, and had carried its full share of the costs since then, he added. He even argued that the structure of Sakhalin-2 could be emulated by other large-scale energy projects in Russia, such as the development of the Yamal gas fields in the north of the country.

“This sort of model, with Gazprom in the lead, and companies like Shell [and others] providing technical expertise and probably some of the financial resources, could work very well there,” he said.

The culture at Sakhalin had not greatly changed since Gazprom had become the majority shareholder, he added. The biggest change, Mr Craig said, is that “after the board meetings, we drink vodka at dinner now, not just wine”.

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