ExxonMobil Negotiating Sakhalin-I Gas Sales To Russia & China.

ExxonMobil Chairman & CEO Lee Raymond said on Nov. 4 the US super-major would consider marketing gas from the giant Sakhalin-I project in Russia's far east in the form of LNG. In what would be an embarrassing climbdown by the company, which has always insisted on a pipeline as the most cost-effective method of delivering gas from Sakhalin, Raymond said the Exxon-led consortium was considering several options, including converting gas to LNG, or piping it to Japan or China.

It would make sense to consider LNG, in which gas is turned into a liquid and transported by ship before being regassified at its destination. That would allow the project, which has recoverable reserves of 458 BCM, to market gas for shorter contract periods to several countries.

Sakhalin-I, which was initially financed by the Japanese government before Exxon took over as operator, had always intended to pipe gas to Japan as a sole market. But Japanese utilities, recently deregulated and no longer answerable to the government, have refused to sign the long-term contracts needed to make a pipeline economically feasible. Japan has no national grid for piped gas and utilities have enough gas from existing contracts to fuel their gas-fired power stations.

Tokyo wants to bring energy from Sakhalin-I to Japan as part of a long-term policy to diversify from Middle Eastern oil. Sakhalin-II, a $10 bn development led by Shell that neighbours Exxon's project, has stolen a march on Sakhalin-I partly because it has marketed gas in the form of LNG. Japanese utilities have signed long-term contracts for 3.4m tons/year of LNG, while South Korea and California have shown interest.

If Sakhalin-I converts to LNG it may have to strike a deal with the Shell-led project, which is building an 800 km land pipeline down the length of Sakhalin island to two LNG trains with the capacity to liquefy 9.6m tons/year which will be on stream in 2007. In fact Sakhalin-II, in which Shell's partners are Japanese trading giants Mitsui & Co. (25%) and Mitsubishi Corp. (20%), is considering building a third 4.8m t/y LNG train to meeting growing demand on the US West Coast as well as in Asia.

The Sakhalin government, which shares in the profits from both projects, favours joint use of existing infrastructure. Julian Barnes at the Shell-led project, said: "I am not aware of any approach made by Sakhalin-I to share our LNG plants. But we would be open to such a discussion if it would bring value to them [Exxon] and to us and our partners".