Shell warns Gazprom of price risks as LNG expansion delayed

YUZHNO-SAKHALINSK, Russia Mon Sep 30, 2013 8:34am EDT

YUZHNO-SAKHALINSK, Russia (Reuters) - Shell (RDSa.L), the global leader in liquefied natural gas, urged Gazprom (GAZP.MM) to expand a plant they jointly own or risk missing out during a peak in gas prices, an executive of Shell's operations in Russia told Reuters.

Shell and Gazprom have been in talks for years about expanding their plant on the Pacific island of Sakhalin, where Japan's Mitsui (8031.T) and Mitsubishi (8058.T) are also shareholders. The plant, known as Sakhalin-2, is Russia's only existing LNG project.

But Gazprom has been slow to expand the 10-million-tonnes-a-year plant due to a number of issues, including difficulty in finding an adequate resource base for the production growth.

Olivier Lazare, who has headed Shell's operation in Russia since January 1, said the partners may miss the opportunity to capitalize on high gas prices if they fail to take a decision to expand the plant.

"I think if we go to the market now, this project will have very high credibility and if you go earlier ... you can actually sell your gas in the market at an attractive price," he said.

President Vladimir Putin has urged the companies to develop the LNG business, vital for expanding into new markets such as the Asia-Pacific region. Europe, a traditional consumer of Russian gas, has been trying to cut its dependency on Russian energy sources.

Sakhalin-2 was one of the world's largest LNG projects when launched in 2009, but has dropped down the pecking order as millions of tons of new capacity came on stream globally, especially in Qatar, Africa and Australia. The United States is also mulling LNG exports.

The project is one of only three production-sharing agreements (PSAs) in Russia's energy sector. The PSA deal allows the project to recoup capital costs from its revenues before sending any royalties to the state.

SAKHALIN-3

Gazprom has so far failed to secure a deal to buy gas from the neighboring Sakhalin-1 project, operated by ExxonMobil (XOM.N). Sources say the partners failed to agree on pricing.

Lazare said the LNG project may find sources of gas from some other areas, such as Gazprom's Sakhalin-3 project, where the Kirinskoye field is set to start producing gas in October.

Gazprom has said it wants to use the deposit for projects other than Sakhalin-2's needs, making Shell's offer also difficult to accept.

(Writing by Vladimir Soldatkin; Editing by Dale Hudson)

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