Regional LNG: Shell struggles to find buyers for Russian LNG
Wednesday, May 21 2003 - 12:33 AM WIB
Tokyo Electric Power Co. and Tokyo Gas Co., the world's second- and third-largest LNG buyers, this month became the Sakhalin 2 project's first two customers by agreeing to buy a combined 2.3 million tons a year starting in 2007. That is less than a quarter of the project's capacity of 9.6 million tons.
The six biggest potential customers in Japan and South Korea, including Korea Gas Corp., the country's sole LNG importer, said they would not need new supply contracts before 2009. Shell had to go ahead without contracts for the plant's capacity to avoid losing its concession to produce the gas for Russia's first LNG project.
"They had to start according to the production-sharing agreement," said Galina Pavlova, director of the mineral resources department at the Sakhalin regional administration. "They didn't have any alternative."
The Shell chairman, Philip Watts, last week announced the company's decision to invest the $10 billion in the project, saying he was confident it could sell the gas, mainly to Asian customers.
Power and gas companies in Japan and South Korea bought almost three-fourths of the world's total LNG output last year, making those countries the main source of potential buyers for Shell. But most of those customers already have supply contracts until the end of the decade with rival LNG producers.
"The earliest our existing LNG contract expires is in 2009," said Shinji Ohno, a spokesman at Osaka Gas Co., Japan's second-largest gas supplier. "Sakhalin 2 is one of the options, but we haven't decided whether to buy from the project."
Osaka Gas buys about 6 million tons of gas a year. Its contract of 790,000 tons annually for Australian gas expires in 2009 and a 1.3 million-ton agreement with Indonesia ends in 2010.
Smaller rival Toho Gas Co. and the other four of Japan's five biggest power producers after Tokyo Electric also said they did not need more LNG by 2007.
Shell had to commit to financing the project without them to stave off growing criticism from Russian rivals, analysts said.
Yukos Oil Co. and Lukoil OAO, Russia's top oil producers, have argued that production-sharing agreements, like the one Shell has in Sakhalin, create unfair advantages for foreign companies because they give tax breaks that are not available to domestic rivals.
"Production-sharing agreements are becoming less popular in Russia and maybe this is why Shell decided to move ahead with the project development," said Kakha Kiknavelidze, an analyst at Troika Dialog brokerage in Moscow.
Shell said the need to comply with the contract's conditions was one of the reasons it announced its commitment to the project.
"We had a number of preconditions - not only gas contracts development, but also in regards to project financing - to meet the terms of our production-sharing agreement," said Steve McVeigh, chief executive of Sakhalin Energy Investment Co., the Shell unit that is developing Sakhalin 2.
Toho Gas, a Nagoya-based gas supplier, is in talks to buy Sakhalin 2's LNG in the next decade.
"The Sakhalin project is one of the options that we could introduce after around 2010 as we have existing contracts that last until that year," said Eiichiro Sato, a Toho Gas spokesman.
Kansai Electric Power Co., Japan's second-largest power company, does not plan to buy any gas from Sakhalin 2 because it "has secured necessary amounts until 2010 through existing contracts," said Kimihito Kawabata, a company spokesman.
Chubu Electric Power Co., Japan's third-largest generator, may buy Sakhalin 2 gas "only in case of an emergency," said Yukiko Morishita, a company spokeswoman.
Tohoku Electric Power Co. and Kyushu Electric Power Co., Japan's fourth- and fifth-largest power suppliers, said they were not currently considering purchases from Sakhalin 2.
"We haven't even started a negotiation yet," said Satoshi Kasugakawa, a spokesman at Tohoku Electric, adding that its contract with Indonesia would be the first to expire in 2009.
Naoko Iguchi, a Kyushu Electric spokeswoman, denied a Nihon Keizai report that the company plans to buy 500,000 tons of Sakhalin 2 LNG.
Korea Gas, the world's largest LNG buyer, said it had finished signing all long-term LNG supply contracts for this year after agreeing to buy as much as 2 million tons from Petroliam Nasional Bhd. of Malaysia. It does not plan to talk to Sakhalin 2 for gas, said a spokesman, Kim Cha Joong.
That means Shell and partners Mitsui Co. and Mitsubishi Corp. may have to look to more distant markets such as in Taiwan, where its transportation cost advantage over rivals is smaller, said Toshinori Ito, a utilities analyst at UBS Warburg Japan Ltd.
Shell and a unit of Asia Cement Corp., Taiwan's largest cement maker, are bidding to supply 1.7 million tons of LNG a year to state-owned Taiwan Power Co. for 25 years starting in 2008. The winner will be selected this month, Taiwan Power said.(*)