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Asahi Shimbun (Japan): Sakhalin II is already a year behind schedule

YUZHNO-SAKHALINSK, Russia–A huge Sakhalin gas and oil project led by Royal Dutch/Shell Group and Japanese trading houses Mitsui & Co. and Mitsubishi Corp. has been suspended by a Russian ministry.
Asahi Shimbun
Published: Sep 14, 2006

Sakhalin II, which is expected to produce 9.6 millions tons of liquefied natural gas, the equivalent of 10 percent of the world’s current annual production, is already a year behind schedule

Sources close to the development said the government of President Vladimir Putin is trying to tighten control over development of natural resources

Sakhalin II is the only major Russian project with no involvement of a local company

Sakhalin Energy Investment Co., a project consortium, has since late August suspended construction of pipelines connecting gas and oil fields off the northern part of Sakhalin and an export terminal in Prigorodnoye at the southern tip of the island

Work has been halted in the southern part of the island following an order by Russia’s Ministry of Natural Resources

The ministry on Aug. 30 ordered Sakhalin Energy to review its onshore pipeline construction plan, because of what it called violations of the environmental conservation law, such as illegal deforestation

Separately, Russia’s Federal Supervisory Natural Resources Management Service filed a lawsuit on Sept. 5 with a Moscow court, demanding revocation of approval for the pipeline construction

Sakhalin Energy is owned 55 percent by Royal Dutch/Shell Group, 25 percent by Mitsui & Co. and 20 percent by Mitsubishi Corp

Sakhalin II includes the construction of Russia’s first LNG processing plant

If the court rules for the Russian agency, the start of natural gas production currently scheduled for summer 2008 could be significantly delayed

Sakhalin Energy argues that the agency’s claim is groundless

Environmental experts, however, have expressed concern about the 800-kilometer pipelines

Russia’s Gazprom, a government-affiliated natural gas monopoly, has been negotiating with the Shell group over acquisition of a 25-percent stake in Sakhalin Energy from Shell, by swapping it with interests Gazprom holds in western Siberian gas fields

No agreement has been reached

Sources said the Russian side is trying to gain advantage in the negotiations between Sakhalin Energy and Gazprom by interfering with Sakhalin II

A source in Sakhalin’s energy industry said Moscow has come to believe that it cannot allow a large-scale energy development project such as Sakhalin II to be carried out without Russian involvement

In Japan, concern is growing about further delays

Domestic electric power and gas suppliers plan to buy 4 million tons or more of natural gas a year collectively

An official of Tokyo Gas Co., which has concluded a contract with Sakhalin Energy to buy 1.1 million tons a year, said it cannot speculate on possible fallout from the Russian government’s moves because Sakhalin Energy has given no official explanation

The company, which imports about 9 million tons of gas annually mainly from Southeast Asian countries, wants to diversify its procurement sources through the Sakhalin II project

Other domestic utilities, including Tokyo Electric Power Co. and Toho Gas Co., also plan to purchase gas from Sakhalin, expecting its proximity to lower transportation costs

Despite growing concerns over the delay, few fear that the project will be shut down

Sources said Russia needs help from foreign companies with advanced technologies for liquefying natural gas and drilling in the cold environment

Taro Shoji, who heads the planning and research division of the Japan Petroleum Development Association, said Russia does not intend to halt the project

“Russia expects to acquire gas liquefaction technologies through participation of Gazprom,” Shoji said

Under Sakhalin II, gas and oil development is under way at Lun and Piltun-Astokhskoye offshore platforms. The combined reserves are estimated at 500 billion cubic meters of natural gas and 1.1 billion barrels of oil.

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