Asians eye Sakhalin gas to diversify supply

Sujata Rao, Reuters, London

Multi-billion dollar oil and gas projects off Russia's Pacific island of Sakhalin could supply energy-hungry Asia in coming years, providing a welcome alternative to Middle Eastern imports, industry players say.

Japan, Korea, China and Taiwan currently import 60 percent of their energy from the Middle East but security of supply concerns in a post-Sept.11 world has made them keen for alternatives, a conference on Sakhalin energy heard this week.

Analysts say political hurdles and fears of economic recession must be overcome before these plans translate into success but oil executives are optimistic so far.

"Asia is a natural market. Our close proximity to the area means we have a niche market," said Steve McVeigh, CEO of the US$9 billion Sakhalin-2, a Shell-led group which is setting up a plant to produce liquefied natural gas (LNG) in Sakhalin.

McVeigh estimates that Sakhalin-2 will be able to capture about a quarter of the East Asian LNG market by 2010, just four years after exports are scheduled to start. These markets are now supplied by Qatar, Indonesia, Malaysia and Australia.

"We believe we shall have a seven to 10 percent price advantage over other suppliers," McVeigh told Reuters.

"After Sept.11, it is a two-sided coin. Asia is keen to ensure supply diversity while Russia is establishing a new profile in terms of ability to supply oil and gas."

While Sakhalin-2 aims to produce 9.6 million tons of LPG a year, supplying it to all four key markets, Sakhalin-1 led by Exxon Mobil hopes to start piping gas to Japan in 2008, reaching volumes of about 28 million cubic metres of gas a day.

While projects are also on to ship Russian oil to Asia it is gas that is likely to be the main area of growth, analysts say. Both Sakhalin projects are in talks with Asian buyers for threshold volumes to kick off investments and production.

These four Asian states comprise one of the most energy deficient areas, importing over 95 percent of their needs and demand, especially for gas, is rising rapidly.