Sakhalin Energy Signs LNG Deal with Shell

In a pioneering deal, Sakhalin Energy Investment Company Ltd (Sakhalin Energy) has signed an agreement to supply 37 million tons of LNG over a 20 year period to Shell Eastern Trading Ltd (Shell) for the North American natural gas market. This represents the first sales of Russian natural gas to North America.

The landmark deal marks the beginning of Sakhalin Island as a strategic new source of natural gas for both Mexico and the US West Coast markets. It confirms Sakhalin Energy as a world-class player in the LNG market, and firmly places Russia in a new strategic position as a global supplier of natural gas.

LNG from Sakhalin Energy will be purchased by Shell to supply the new Energía Costa Azul plant that will be constructed in Baja California, Mexico. Natural gas from the new terminal will be used to satisfy Mexico's growing energy needs, with excess natural gas exported from the Mexican terminal to California in the US where, as in Mexico, there is an increasing requirement for new natural gas supply sources. The agreement calls for significantly higher volumes of LNG deliveries during the first three years, with a plateau supply of 1.6 million tons per annum (approximately 0.2 BCF/d).

"Sakhalin Energy and Russia have created a fundamental shift in global natural gas supplies," commented Ivan Malakhov, Governor of the Sakhalin Oblast. "Russia has been a reliable supplier of natural gas into the European market via pipeline for many years. Now, with Sakhalin Energy's decision, in partnership with the Russian Government, to opt for LNG as the most flexible way to export natural gas from the Russian Far East, the traditional supply dynamics for natural gas have been transformed. An exciting chapter in Russian energy supply has been opened".

Sakhalin Energy and Shell have signed the full Sales and Purchase Agreement (SPA) with first deliveries expected early 2008. Sakhalin Energy will also provide the ships to deliver the LNG to the Baja California terminal.

Ian Craig, CEO of Sakhalin Energy, said, "This is a major LNG supply deal. We look forward to developing a long relationship delivering Sakhalin LNG to North America, and facilitating Russia's development as a supplier of natural gas to the region. We knew that we were the closest Asian supplier to the west coast of North America, a potentially huge market waiting to be tapped. We are extremely pleased that our three shareholders, Shell, Mitsui and Mitsubishi and the Russian Government strongly support the supply of Russian natural gas to meet North America's energy needs. Natural gas is one of the cleanest fuels available, and makes LNG a natural choice for customers in North America."

Catherine Tanna, Director, Shell Gas & Power, Americas and Africa, said, "Shell is pleased to have played the leading role in pulling together a complex chain from Sakhalin in the east of Russia across the Pacific into Mexico and the US. Shell's commitment to bring LNG into Mexico, initially through our Altamira terminal on the Gulf coast and now into Baja California affirms our commitment to Mexico. Excess natural gas will be marketed in the US by Shell's affiliate Coral Energy, helping to meet the growing customer demand for a consistent, long-term supply of clean-burning energy in North America. Taking the capacity at Baja California and our rights to future capacity creates an important strategic option for us to ensure future greenfield and expansion projects in the Asia Pacific materialize this decade."

First LNG production from Sakhalin Energy is expected in late 2007. Total production capacity at the project will be 9.6 mtpa when both of the first two trains are in operation in 2008. The SPA with Shell brings the total long-term sales deals for Sakhalin Energy LNG to 5 mtpa. Sakhalin Energy remains in discussion with both its existing and other potential customers in Japan, Korea and China and is confident of further progress over coming months.