Sakhalin Energy has no plans to enlarge its Sakhalin-2 liquefied natural gas venture in Russia's Far East for now, the company's Chief Executive said Tuesday, dashing the hopes of some Russian officials that the project could be expanded.
Ian Craig said the company had decided not to progress to a third LNG train at Sakhalin-2, though there were sufficient natural gas reserves in the license area to underpin an expansion.
He said the Sakhalin shareholders would take a view on whether to ramp up the project taking into account projections for LNG demand.
Russia's first LNG project, Sakhalin-2 is key to the country's efforts to access the lucrative energy markets of Asia. Most of Russia's gas is sent by pipeline to Europe, but OAO Gazprom (GAZP.RS), the Russian natural gas giant, sees LNG as the key to diversifying its customer base.
LNG is gas that is supercooled to minus 162 degrees and can be sent round the world on tankers.
A number of LNG plants are expected to come onstream over the next year, vastly increasing global production capacity of the fuel. That's coming at a time when the global recession is damping demand for energy. Industry and electricity generators have sharply reduced their use of natural gas in recent months.
The Sakhalin-2 LNG plant was finally launched with much fanfare in February, and its first LNG cargo is due to arrive in Japan Wednesday. Most of its production has already been presold under long-term contracts to Japan, South Korea and the U.S., and is ultimately expected to provide 8% of Japan's LNG demand and 5% of South Korea's.
Sakhalin Energy was originally controlled by Royal Dutch Shell PLC (RDSB.LN), in partnership with Mitsui & Co. (8031.TO) and Mitsubishi Corp. (8058.TO) of Japan. But in 2006 Shell was forced to cede a majority stake in the project to OAO Gazprom, after a campaign of administrative pressure by the Russian authorities. All the other shareholders had to reduce their holdings, and Shell now has a 27.5% share.
A $20 billion investment, Sakhalin-2 is one of the world's largest and most complex energy projects, and there has been concern that it might prove unprofitable with oil prices at their current low levels.
But Mr. Craig stressed the project's economics were "still pretty sound." The price of oil, currently around $50 a barrel, is still well above what it was when the project was sanctioned in 2003, even though industry costs have risen strongly since then.
Russian officials have often spoke of expanding Sakhalin-2. The regional governor of Sakhalin Island, Alexander Khoroshavin, said in 2007 that a third LNG train could be built at the plant, in addition to the one already producing and a third due to come onstream in the middle of this year.
Some in the industry have pointed to Sakhalin-3, another license area that could provide additional resources of natural gas for the plant.
But Mr. Craig said the Russian government hadn't decided who would take the lead on developing Sakhalin-3, and said the priority should be to bring the existing facilities at Sakhalin-2 up to full capacity.
He said the Sakhalin plant was currently producing around 3.6 million tonnes a year of LNG, and will reach plateau production of 9.6 million tonnes a year in early 2010.
Mr. Craig said the change in Sakhalin Energy's shareholder structure had had little impact on the day-to-day running of the company, though there was more bureaucracy.
"The more shareholders you have, typically the more complicated the approval process will be," he said.
Mr. Craig said a Gazprom subsidiary had been contracted to operate the project's onshore pipelines, but there were still few Gazprom technical experts working in Sakhalin.
Gazprom had the right to nominate a new CEO, but had asked him to stay on till the end of the year, Mr. Craig said.