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REUTERS SUMMIT-Shell warns Gazprom of price risks as LNG expansion delayed

Mon, 30th Sep 2013 12:32

* Shell, Gazprom yet to agree on Russia's sole LNG plant expansion

* Shell proposes to use gas for the plant from Gazprom's Sakhalin-3

By Denis Pinchuk

YUZHNO-SAKHALINSK, Russia, Sept 30 (Reuters) - Shell, the globalleader in liquefied natural gas, urged Gazprom to expand a plant theyjointly own or risk missing out during a peak in gas prices, an executive ofShell's operations in Russia told Reuters.

Shell and Gazprom have been in talks for years about expanding their planton the Pacific island of Sakhalin, where Japan's Mitsui and Mitsubishi are also shareholders. The plant, known as Sakhalin-2, is Russia's onlyexisting LNG project.

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

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

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

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

Sakhalin-2 was one of the world's largest LNG projects when launched in2009, but has dropped down the pecking order as millions of tonnes of newcapacity came on stream globally, especially in Qatar, Africa and Australia. TheUnited States is also mulling LNG exports.

The project is one of only three production-sharing agreements (PSAs) inRussia's energy sector. The PSA deal allows the project to recoup capital costsfrom 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 neighbouringSakhalin-1 project, operated by ExxonMobil. Sources say the partnersfailed 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 startproducing gas in October.

Gazprom has said it wants to use the deposit for projects other thanSakhalin-2's needs, making Shell's offer also difficult to accept. (Writing by Vladimir Soldatkin; Editing by Dale Hudson)

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