ONGC, Shell in talks for Sakhalin gas liquefaction

Oil and Natural Gas Corporation, through its consortium partner in the Sakhalin-1 field in Russia Exxon Mobil, is in talks with Royal Dutch Shell for liquefying the gas from the fields before it is exported to China.

"We always wanted to set up a gas liquefaction terminal in Sakhalin island to facilitate easier export of gas. Liquefaction of gas at Shell's existing plant would certainly suit us," said a senior government official.

The operator of the field, Exxon Mobil, had on October 19, 2006, signed a preliminary agreement to sell all of the natural gas exports from the field to China National Petroleum Corporation.

The agreement has led to a Sales and Purchase Agreement with the Chinese company, the process of which has already begun.

Exxon Neftegas, Exxon's Sakhalin subsidiary, has already submitted the first draft of the deal to CNPC in December 2006.

ONGC, through its overseas arm ONGC Videsh, owns 20 per cent stake in the Sakhalin-1 field. Exxon holds 30 per cent stake while Rosneft owns 20 per cent. The consortium is looking to work out an agreement through which the gas will be liquefied at Shell's liquefaction plant in the Aniva Bay in Sakhalin.

This plant, located in the block adjoining the Sakhalin-1 field, has a 9.6 million-tonne per annum capacity. The plant, set up under Sakhalin-2, has already contracted to sell more than 7 million tonne of LNG to Japanese and Korean buyers.

The consortium aims to sell 8 billion cubic metres of gas per year to China. Exxon is also in talks with Gazprom to secure access to China via the company's pipeline network. The price at which the gas would be sold to CNPC is not known yet.

Once the gas is liquefied, it gives the consortium the option of transporting the gas to China by tankers bypassing the pipeline network over which the Russian company has a monopoly.

International analysts also say that a pipeline from Russia to China would cost about $13 billion, besides having to cross some difficult territory.

"We can cut some corners on costs by liquefying the gas," the government official said. "Moreover, with the revenues generated from the gas sale to CNPC, ONGC - which itself is planning to get into the LNG business with the Mangalore terminal - can work on deals to import LNG," he added.

Currently, gas from Sakhalin-1 is only sold within Russia. Sales stand at 1.7 billion cubic meters a year. The potential recoverable reserves of Sakhalin-1 are 2.3 billion barrels of oil and 485 billion cubic meters of gas, according to the Sakhalin website.