Tokyo Gas wants cheaper gas from Shell’s Sakhalin unit

Tokyo Gas wants Shell Group's Russian unit to sell gas at lower-than-current Asian rates after China gained a 25 % cut in its first LNG contract.
Tokyo Gas will start negotiations next month with a Shell-led project in Russia's eastern Sakhalin islands to buy as much as 1 mm tpy of LNG, starting 2007, in the first such sales from Russia. The company said it would use China's contracts with Australia and Indonesia last year as a starting point for negotiations.

China last year won the largest LNG price cut in the industry's history, for supply to Guangdong province. China will pay a quarter less than Japanese buyers, who imported their first LNG from Alaska in 1969 and consume almost three-fifths of global output.
"We'll certainly use the China contract in our negotiations for Sakhalin gas," said Shigeru Muraki, head of gas resources at Tokyo Gas. "The Guangdong price is an advantage for Japanese buyers."

Japan is the world's top LNG importer, buying $ 12.5 bn of the fuel last year andits gas and power companies want more of the fuel that's cleaner-burning and cheaper than oil. Asian utilities could help to unlock as much as $ 30 bn of investment planned for Shell's Sakhalin 2 and rival Sakhalin developments led by ExxonMobil and BP.
Shell and its rivals are under pressure to sign up customers because they will compete with a string of new LNG projects in the Asia-Pacific region, including BP's Tangguh project in Indonesia and Petroliam Nasional's Tiga project in Malaysia that may produce a glut of the fuel as early as 2005.

The Shell-led Sakhalin project would require construction of two more production platforms, oil and gas pipelines and gas liquefying plants. Two production lines would produce a combined 9.6 mm tpy of LNG. The plant would be the first in Russia, according to the partners.
Tokyo Gas, Japan's largest gas distributor, currently buys LNG in Asia from projects in Malaysia and Brunei where Shell has investments. China's contract, signed after it introduced Asia's first open bidding, surprised Japan's energy industry because of the extent of the cut.

"I call it the 'Guangdong shock,'" said Katsuhiko Suetsugu, secretary general of the Asia Pacific Energy Forum, a private research group. He estimated that the Guangdong price was fixed at about $ 3 per mm Btu. Japanese buyers pay about $ 4.
Rachmat Sudibyo, head of Indonesia's Oil Gas Regulatory Body, said last year that a BP-led project in Indonesia would sell gas to Fujian province, China at about $ 2.40 per mm Btu, the same price offered for the Guangdong contract. That price, which excludes the cost of shipping of 30 cents to 40 cents per mm Btu, is based on a formula linked to assumed oil prices of about $ 20 a barrel.