Regional LNG: Shell sees bright prospects for Sakhalin gas

The Sakhalin II liquefied natural gas project, in which the Royal Dutch/Shell Group (RD) is the largest shareholder, has signed contracts for 70% of its expected capacity, a senior company official said Wednesday as quoted by Dow Jones.

With strong gas demand expected in future years, Shell is mulling the possibility of expanding the Sakhalin project to build a third train, said Peter de Wit, President, Shell Gas & Power Asia Pacific.

The Sakhalin II project will come on stream at the end of 2007 with an LNG output capacity of 9.6 million tons a year, which Shell hopes will be fully sold when deliveries start.

"Gas demand is climbing rapidly and we will see double digit growth in the next five to 10 years. The (South Korea) LNG deal is a sign of things to come," de Wit said in an interview with Dow Jones Newswires.

On Wednesday, state-run Korea Gas Corp. selected Russia's Sakhalin II project, Yemen Liquefied Natural Gas Co. and Malaysia LNG to supply 5 million metric tons of LNG to the country for 20 years starting in 2008.

Shell has a 55% stake in Sakhalin II and 15% share in Malaysia LNG, which together will supply up to a total of 4 million tons a year of LNG to South Korea.

The award of the $20 billion LNG supply contract from 2008 will replace a current contract which will expire in 2007 for 2.3 million tons a year from Indonesia's Arun field.

Five candidates were shortlisted out of 12 original contenders for the supply contract, which also included Australia's North West shelf venture. Shell is also a partner in the Australia project.

South Korea is the world's second-largest LNG importer, after Japan, importing close to 20 million tons a year, mostly from Indonesia.

With South Korea's 2.3 million tons-a-year import contract from Indonesia's Arun plant expiring in 2007, and gas demand rising 3.9% annually to 31.7 million tons in 2017, Shell will be in a strong position to tap growing South Korean demand.

Shell Aims To Be Top LNG Supplier

LNG spot trading in Asia is soaring, due to higher gas demand and because of South Korean and Japanese having to buy cargoes off the shelf to offset lower supplies from Indonesia's rapidly depleting Bontang and Arun gas fields before new long-term contracts kick in.

Shell's Sakhalin project is also in talks with Tokyo Gas for a LNG supply contract.

With the latest gas supply deal with South Korea, Shell is staking its claim to be the world's top LNG supplier.

"The selection of two Shell joint ventures in such an important tender underlines Shell's global LNG leadership," said de Wit in a statement issued following the announcement of the deal.

"It also reflects the strengthening of the Asia Pacific market, reflecting an overall increase in global demand for LNG and the value of our diverse portfolio of LNG projects," he said.

According to the Australian Bureau of Agricultural & Resource Economics, Asian and U.S. West Coast LNG demand alone will reach 150 million-163 million tons in 2015, which implies spot volumes may total 1.63 million tons in that year.

Asian demand was 83 million tons in 2003 and is expected to reach 85-95 million tons in 2005.

And then there is China, which is pushing ahead with construction of a string of LNG receiving terminals around its coast.

"We are in discussions" with Chinese companies on the potential of importing LNG from Sakhalin II, said de Wit, who declined to give more details.

And Shell will be looking to possible deals with Japan and China to help it launch a third train from Sakhalin II.

"The possibility for expansion is there, and we have embarked on a feasibility study on a third train," said de Wit.(*)