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The Scotsman: S.Korea in talks for extra LNG if Sakhalin delayed

By Moon Hae-won
Fri 22 Sep 2006

SEOUL (Reuters) – South Korea’s dominant liquefied natural gas importer is in talks to secure alternate supplies in case its shipments from Royal Dutch Shell’s $20 billion (10.6 billion pound) Sakhalin LNG project are delayed, a company source said on Friday.

Importers in Japan, which is counting on Sakhalin-2 to meet some 6 percent of the country’s growing gas demand, said they were considering their options after Russia revoked key environmental permits and Shell warned of potential further set-backs.

Signs that customers are looking elsewhere may put operator Shell and its Japanese partners under additional pressure to sell a stake to state gas giant Gazprom, whose interest is seen as part of a Kremlin campaign to tighten its grip on the sector.

This week a Russian diplomat said the project would move forward more quickly with Gazprom involved, while Japan warned that political ties may suffer if its supplies were threatened. Gazprom says year-old talks over taking a stake have stalled.

Shell has already been forced to push back the production date for the 9.6 million tonnes per year (tpy) project to mid-2008 from late-2007 amid a doubling in costs announced in July last year. The latest potential set-back has caused more anxiety.

“As alternative plans, we have been contacting other suppliers to secure contracts, but I cannot reveal who they are,” said an official from Korea Gas Corp (KOGAS).

“We are considering spot LNG and extending current contracts,” said the source, who asked not to be named.

A further delay could open up a supply gap of 1.5 million tpy, the volume that KOGAS has contracted to buy for 20 years starting from September 2008.

Although only about 5 percent of South Korea’s total LNG imports, the shipments may be difficult to fill in the short-term as most supplies are locked up in long-term contracts sealed years ago and competition can be fierce for scarce spot cargoes.

Work on Sakhalin is three-quarters complete. Installation of all its offshore pipelines was completed in August and some liquefaction facilities are finished.


Japan and South Korea, the world’s number one and two LNG importers, depend on the super-cooled natural gas for almost all of their supplies. They have been seeking new sources as exports dwindle from older projects in top seller Indonesia.

Buyers in Japan have begun considering how they might meet a shortfall in supplies. Japanese utilities and importers have contracted to buy at least half of Sakhalin-2’s capacity, which would meet about 6 percent of their imports.

“A new LNG project typically does not supply contracted volumes at the start, so we do not expect to receive the full contracted volumes (from the start) and the impact of possible losses on our operation will be limited,” said a spokesman for Tokyo Gas Co. Ltd., which is due to take 1.1 million tpy.

“We will use various ways if we need alternative LNG supplies, such as swapping (LNG cargoes) with other buyers, buying spot cargoes… Very hypothetically, compensations and damages might be considered but we will discuss with the seller for the best remedy even if the delay should become unavoidable.”

Some contracts, such as that for Japan’s Chubu Electric Power Co., do not begin until years after the launch, leaving them less vulnerable to disruptions.

Chubu, which will buy 500,000 tpy of Sakhalin-2 gas from 2011, is considering alternatives, including extending term contracts with Indonesia and other countries, a spokesman said.

Shell has a 55 percent stake in the project, while Japan’s Mitsui & Co. Ltd. and Mitsubishi Corp. own a combined stake of 45 percent.

(Additional reporting by Ikuko Kao and Osamu Tsukimori in Tokyo)

(c) Reuters 2006. All rights reserved.

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