Sakhalin Energy Signs LNG Supply Deal with Hiroshima Gas

Sakhalin Energy has signed a Heads of Agreement for the long-term sales and purchase of up to 0.21 million tons per annum (mtpa) of LNG for 20 years to Hiroshima Gas Co., Ltd.

The sales deal with Hiroshima Gas is the fifth agreement signed with a utility company in Japan. Sakhalin Energy and Hiroshima Gas will now continue to finalize the Sales and Purchase Agreement with deliveries expected to commence in 2008.

This deal also represents the first involving the use of a small LNG carrier, and indicates the flexibility that can be offered at the LNG plant marine loading facilities. In comparison with other contracts that normally use LNG tankers in excess of 125,000 cu m capacity, Hiroshima Gas is planning to use its newly built ice class LNG vessel with a capacity of about 20,000 cu m to transport the LNG to its own receiving terminal in Hatsukaichi.

This deal continues to develop Sakhalin Island as the new strategic source of natural gas for Japan, and the wider Asia Pacific Region as a major new market for Russian gas supplies.

Sakhalin Energy's Chief Executive Officer, Ian Craig, said: "This deal yet again demonstrates the ability of Russia in general and Sakhalin Island in particular to become an important future long-term energy supplier to Japan. We look forward to building a lasting relationship with Hiroshima Gas and justifying their confidence in the Sakhalin II Project."

LNG will be supplied from Sakhalin Energy's 9.6 mtpa LNG plant, which is under construction at Prigorodnoye at Aniva Bay on the southern tip of Sakhalin. This will be the first LNG plant to be built in Russia, and overall design, procurement and construction work on the plant is now more than 65 percent complete. The plant will have two gas liquefaction process trains, each with a capacity of 4.8 mtpa.

Governor of Sakhalin Region, Ivan Malakhov, said: "We are pleased to see Hiroshima Gas join our other four Japanese customers as purchasers of natural gas from Sakhalin. We believe Sakhalin's position as next-door neighbors to Japan coupled with Russia's reputation as a reliable energy supplier makes Sakhalin LNG a natural choice for the Japanese utility companies. This agreement will cement the growing relationship between our two countries."

Mr. Hideo Taketa, Hiroshima Gas Managing Director, said: "The location of Sakhalin and our ability to obtain a competitive and flexible supply deal made Sakhalin LNG a natural choice for us. We look forward to a beneficial long-term business relationship with Sakhalin Energy."

Sakhalin Energy Investment Company Ltd. is an incorporated company, established in April 1994 and based in Yuzhno-Sakhalinsk, Russia for the purpose of the implementation of and development of the Sakhalin II integrated oil and gas project. The shareholders in Sakhalin Energy are: Shell Sakhalin Holdings B.V. with 55 % interest (parent company – Royal Dutch/Shell), Mitsui Sakhalin Holdings B.V. with 25% (parent company – Mitsui & Co., Ltd.) and Diamond Gas Sakhalin B.V. with 20 % (parent company – Mitsubishi Corporation).

The following sales deals have already been agreed:

  • Tokyo Gas, 1.1 mtpa, starting from project commencement for a period of 24 years;
  • Tokyo Electric, 1.5 mtpa, starting from project commencement for a period of 22 years;
  • Kyushu Electric, 0.5 mtpa, commencing 2009 for a period of 22 years;
  • Toho Gas, 0.3 mtpa, commencing 2010 for a period of 24 years;
  • Baja Mexico (Shell Eastern Trading), 1.6 mtpa starting from project commencement for a period of 20 years.
  • Korea Gas Corporation, 1.5 mtpa commencing January 2008 for a period of more than 20 years.

The Sakhalin II development represents the largest foreign direct investment project underway in Russia. It was the first Production Sharing Agreement (PSA) to be signed in Russia and the first PSA to go into operation.

Phase 1 has been producing oil from the Vityaz Complex offshore Sakhalin since July 1999. The Vityaz complex consists of the Molikpaq production platform, a single anchor leg mooring buoy and the Okha floating storage and offloading unit, and is located on the Astokh feature of the Piltun Astokhskoye (PA) reservoir offshore Sakhalin. The Molikpaq is the first offshore oil production platform in the Russian Federation.

Production is currently limited to the ice-free period during the summer months. Production during the 2004 season amounted to 11.6 million barrels. Sakhalin Energy has sold its crude oil to refineries in seven different major markets - Japan, Korea, China, Taiwan, the Philippines, Thailand and the USA.

Phase 2 of the Sakhalin II Project is thought to be the biggest single integrated oil and gas project ever undertaken. It entails the further development of the PA field – an oil reservoir with associated gas – and the development of the Lunskoye field – a gas reservoir with associated condensate. Apart from the LNG plant, the project also calls for a further oil and gas production platform on the PA field and a new gas platform on the Lunskoye field. Both platforms are currently under construction in Vostochny in the Russian Far East and Korea.

An onshore processing facility is being built to separate gas and condensate from the Lunskoye field. Pipelines will transport the oil and gas more than 800 km to an oil export terminal and the LNG plant at Prigorodnoye on the southern end of Sakhalin Island, which remains largely ice-free year round. The Phase 2 Project will also enable year-round production from the Molikpaq platform.

Year-round oil production is expected in 2006, and deliveries from the new LNG plant are planned to commence end 2007.