RPT-UPDATE 5-Russian LNG plant extends Kremlin's energy reach

Wed Feb 18, 2009 3:12pm GMT

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By Tanya Mosolova and Denis Dyomkin

PRIGORODNOYE, Russia, Feb 18 (Reuters) - Russia inaugurated a $22 billion Pacific natural gas project on Wednesday that will allow the Kremlin to extend its reach in world energy markets from its European stronghold into Asia and North America.

Sakhalin Energy, controlled by Russian gas export monopoly Gazprom (GAZP.MM), will this year supply about 50 cargoes of liquefied natural gas from the project, which became a focal point in a state drive to reassert control over its resources.

President Dmitry Medvedev said Russia would be able to supply 5 percent of world demand for the super-cooled gas once the Sakhalin-2 project reaches full capacity next year.

"This strengthens Russia's position as a major energy market participant," he said at an opening ceremony on the southern tip of Sakhalin island, in temperatures of minus 20 degrees Celsius.

Medvedev also repeated calls for closer ties between Russia and the Organisation of the Petroleum Exporting Countries (OPEC) and the club of top gas exporters. His previous calls have sent jitters through consumers, although worries subsided after Russia made no formal pledges to reduce oil output or exports.

Deputy Prime Minister Igor Sechin, who oversees the energy sector, said Russia would send a delegation to the next OPEC meeting in March.

The Sakhalin-2 project, in which Royal Dutch Shell (RDSa.L) owns a minority stake after cedeing control to Gazprom, is the first LNG plant in Russia, the world's largest producer of gas.

"This year, the project will ship around 50 145,000-cubic-metre tankers of LNG and about 50 cargoes of oil, each 700,000 barrels," Sakhalin Energy Chief Executive Ian Craig told a news briefing ahead of the launch.

The plant will ultimately produce 9.6 million tonnes per year of LNG. A Sakhalin Energy spokesman said total LNG volumes were equivalent to 3.2 million tonnes for this year, about half of earlier government estimates of 6.0 million tonnes.

The amount is expected to rise to about 160 cargoes as the facility reaches full capacity next year.

About 65 percent of the plant's output will be shipped to eight companies in Japan, the world's top consumer of LNG, with the rest sold to South Korea and the LNG-hungry North American market via a Mexican terminal, then on to the U.S. West Coast.

Japanese Prime Minister Taro Aso said the plant would supply 7.2 percent of his country's LNG imports. "To have an LNG plant in close proximity to Japan has been Japan's dream for many years," he said at the launch ceremony.

FIRST CARGO IN MARCH

Sakhalin-2, a two-day boat ride from Tokyo, is the world's most modern LNG facility. Gas from offshore deposits is chilled into liquid at minus 160 degrees Celsius for shipment by tanker.

The first cargo is expected to load at the end of March, said Hisanori Yoshimura, a member of the board of directors of Mitsubishi Corp (8058.T), which also holds a stake in the project. Mitsui (8031.T) is the other Japanese shareholder.

Tokyo Gas Co (9531.T) and Tokyo Electric Power Co (9501.T) are likely to split the first cargo, company officials told Reuters at the launch ceremony.

The first tanker, the 145,000-cubic-metre Grand Aniva, was built by Mitsubishi in Japan and is owned 60 percent by Nippon Yusen K.K. (9101.T), Japan's biggest ocean shipping firm, and 40 percent by Russian shipping group Sovcomflot.

At 290 metres in length, the 15-storey tanker is the biggest commercial vessel in Russia.

South Korea, second only to Japan as an LNG buyer, has secured about 1.5 million tonnes of LNG for the next 20 years, its Energy Ministry said. Shipments from Sakhalin to South Korea will take three days, compared with 15 from the Middle East.

KREMLIN CONTROL

On a temporary stage at the plant, the heads of the four shareholders pushed a symbolic button to mark the launch of the plant. Relations between the companies were not always so warm.

The battle for control of Sakhalin-2, which is launching after several delays, became symbolic of resource nationalism in Russia and the state's ability to overturn previous deals.

Gazprom bought control of the venture in 2006 after a prolonged crisis that forced Shell, the project's former leader, and its partners to reduce their holdings.

Gazprom Deputy Chief Executive Alexander Medvedev said the profitability of the project would not be harmed by the drop in oil prices CLc1 to below $40 a barrel from July's $147 peak.

"This isn't surprising, because global oil prices were below $20 a barrel when the project began," he told reporters.

And Japan seems unshaken by the history of the deal. The country does not have easy access to pipelines and last year imported 69.26 million tonnes of LNG, with more than half supplied by Malaysia, Indonesia and Australia. (Additional reporting by Angela Moon in Seoul, writing by Robin Paxton; Editing by Keiron Henderson)

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