Gazprom’s Sakhalin-I natural gas must be rerouted from China

Jun 22, 2007 02:00 AM

Having concluded the deal for Sakhalin-II, Gazprom has turned its steely attention to another major project in the region, Sakhalin-I. Deputy Chairman of the Gazprom supervisory board Alexander Ananenkov announced that all the natural gas from Sakhalin-I must be rerouted from China, as the projects shareholder planned, to the domestic market.
The Ministry of Industry and Energy supports the idea. Industry analysts say, however, that export attracts Rosneft more than Sakhalin-I shareholders.

Ananenkov, speaking at a session of the presidium of the commission on the economic development of the Russian Far East and Transbaikal, stated that “Consumption of gas in just the four Far Eastern regions of the country exceeded 15 bn cmpy. We consider it necessary for the gas from Sakhalin-I to be sold by Gazprom so we can gasify those regions, and the gas not to go for export.”
Ananenkov noted that production will begin at Sakhalin-III no earlier than 2014, and there will be no other raw material to guarantee the regions' supply until then.

The Industry and Energy Ministry supports Gazprom's initiative.
“Without that gas, the region's [energy] balance will not work out,” Deputy Minister Andrey Dementyev claimed. He emphasized that the gas could be delivered “wherever” on the domestic market, while “there exists a single window for export.” He was referring to Gazprom's monopoly right to export natural gas.
The Sakhalin-I project is being implemented on a product-sharing basis. Its shareholders are the US ExxonMobil (30 %), Japanese SODECO (30 %), Indian ONGC (20 %) and Rosneft (20 %). According to Industry and Energy Ministry data, total category C reserves at Sakhalin-1 amount to 329 bn cm. The project is to produce 11.4 bn cm per year.

ExxonMobil began providing gas on the domestic market for Khabarovskenergo and Khabarovskkraigaz at the end of 2005. They are to receive 3 bn cm of gas in 2009. The remainder, more than 8 bn cm, the operator planned to sell to China. At the end of last year, ExxonMobil concluded a preliminary agreement on gas supplies with China and the deal was to be finalized by the end of this year.
Gazprom objected to the distribution of the gas in that manner more than once and expressed the intention of buying all of the gas at the well. The possibility of liquefying the gas from Sakhalin-II has also been considered.
“But gas can be sold to the plant and be sent for processing,” a source connected with Sakhalin-I noted.

Analysts doubt that the gasification of the Far East is the real reason for Gazprom's resistance to the export of Sakhalin-I gas. Under the gasification program for the region approved by the government on June 15 (with final approval expected in autumn), 9-12 bn cm of gas will be consumed there. The possibility of China's buying Sakhalin-I gas interferes with Gazprom negotiations over gas supplies to that country.
At the 11th Economic Forum in St Petersburg, Gazprom department head Stanislav Tsygankov stated that the Chinese CNPC was trying to negotiate a purchase price based on the price for Sakhalin-I gas.

“In this case, it's not just a matter of the gasification of the region,” Troika Dialog analyst Valery Nesterov said. “The shareholders in the project are being pressured. But there are not just foreigners among them, as it was in Sakhalin-2. There is also Rosneft, for which export deliveries are preferable.”
At ExxonMobil, they stated that negotiations are continuing with the Chinese and a discussion is underway with Gazprom “on the possibility of cooperating on deliveries to China.” They stated at ExxonMobil that all options for the sale of gas are being considered with the goal of maintaining the profitability of the project.

Long-term plans for Sakhalin-1 will be subject to negotiation, experts suggest.
“The energy balance is not a law,” said Nesterov. “It cannot be implemented by force.”
He added that product sharing projects are not subject to the law on a single export channel. BrokerCreditService analyst Maxim Shein suggested that conditions for liquefying Sakhalin-II gas would be the topic of negotiations in the end.

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