Sakhalin Energy signs major LNG supply deal with Tokyo Gas
Sakhalin Energy has achieved a key milestone in the development of the Sakhalin 2 Phase II project with the announcement today that it has reached an agreement to supply Tokyo gas with up to 1.1 million tonnes a year of liquefied natural gas (LNG) for a period of some 24 years.
The landmark deal marks the beginning of Sakhalin Island as a strategic new source of gas for Japan and confirms the wider Asia Pacific region as a major new market for Russian energy supplies. It also heralds the start of Russia and Sakhalin Energy as a major new player in the worldwide LNG market.
Steve McVeigh, Chief Executive Officer of Sakhalin Energy, and Hideharu Uehara, President of Tokyo Gas, signed a Heads of Agreement (HoA) for the long-term supply of LNG, and first deliveries are expected to start in 2007. The two companies will now continue negotiations to enable a full sale and purchase agreement (SPA) to be signed in 2004.
The Tokyo Gas agreement represents one of the key steps on the road to the Company's shareholders - Shell, Mitsui and Mitsubishi - confirming a positive investment decision to proceed with the development of the US$ 9 billion Sakhalin 2 Phase II integrated oil and gas project. The HoA is also contingent on a formal Declaration of Development Date for the Lunskoye gas and condensate field, which will be the main supply of feedstock natural gas for the LNG plant. Announcements regarding both these major decisions are expected shortly.
"We were always confident that the Asia Pacific was a major new market waiting to be tapped by Russian gas," said Sakhalin Energy Chief Executive Officer Steve McVeigh, "and we were equally confident that customers in Japan would launch the Sakhalin 2 Project with its associated LNG.
The LNG market is fiercely competitive at the moment, with many other suppliers competing for business, coupled with uncertainties over deregulation and slow economic growth in the region. The Tokyo Gas deal marks a major breakthrough for Russia and Sakhalin Energy in the LNG business.
"Given our decision today to introduce Sakhalin LNG with high competitiveness, we are confident that this will realize further expansion in the demand of natural gas. We hope this will greatly contribute to the development of a better and stronger relationship not only between Sakhalin Energy and Tokyo Gas, but also between the Sakhalin Region and Japan and between Russia and Japan."
Sakhalin Oblast Governor Igor Farkhudinov commented: "We are pleased with this announcement of positive LNG sales progress of the Sakhalin 2 project. We hope this first long-term sales of LNG to Tokyo Gas brings the development of the Lunskoye gas/condensate field closer to reality, and to establishing the Sakhalin Region of Russia as a strategic energy supplier to the Asia Pacific. We look forward to this LNG supply agreement acting as a springboard to developing closer ties between Russia and Japan."
LNG will be supplied from Sakhalin Energy's major new LNG plant, which is planned for construction at Prigorodnoye on the southern tip of Sakhalin. Front-end engineering design work on the plant has been completed, and full construction activities on the plant are expected to commence within the next three months subject to final approvals from the Russian authorities. The LNG plant is a major part of the Sahalin 2 Phase II project, and will have a total capacity of 9.6 million tonnes per annum (mtpa). The plant will have two gas liquefaction process trains, each with a capacity of 4.8 mtpa - currently the largest LNG trains planned in the world.
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