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Venture plans to ship Russian gas to U.S.

As soon as three years from now, some Americans may have Russia to thank for their electricity.
/ Source: Houston Business Journal

As soon as three years from now, some Americans may have Russia to thank for their electricity.

As production of natural gas in the United States continues to decline, it's expected that 75 percent of the country's power requirements in the next decade will be provided by imports of liquefied natural gas, or LNG.

And LNG from Russia's Sakhalin Island is likely to begin arriving on the U.S. West Coast by 2007.

So says Steve McVeigh, a former executive of Houston-based Shell Exploration & Production Co., who, since December 2000 has been serving as CEO of Sakhalin Energy Investment Co.

Sakhalin Energy is a joint venture in which Royal Dutch/Shell holds a 55 percent partnership along with Mitsui, which owns 25 percent; and Mitsubishi subsidiary Diamond Gas, which owns 20 percent.

The Sakhalin Energy partnership, which was formed in 1994 and until October 2000 included Houston-based Marathon Oil Co., signed the first production sharing agreement, or PSA, issued by Russia.

The agreement gave Sakhalin Energy permission to develop two fields off the coast of Far East Russia's Sakhalin Island which contain recoverable hydrocarbons of 1 billion barrels of oil and 500 billion cubic meters of natural gas.

The oil field began producing in 1999.

Now, Sakhalin Energy is poised to move ahead with Phase II, a $10 billion project that is currently the largest single foreign direct investment project in Russia and what McVeigh says is "the biggest integrated oil and gas project ever undertaken."

In Phase II, Sakhalin Energy will build Russia's first LNG plant, which will have an annual capacity of 9.6 million tons.

Sakhalin Energy has already signed LNG contracts with three Japanese buyers -- Tokyo Gas, Tokyo Electric and Kyushu Electric -- for a total of 2.8 million tons of LNG a year for more than 20 years.

Japan is just two to four days sailing time away from Sakhalin Island. South Korea is four to five days, China six to seven, and the U.S. West Coast is seven to 15 days away.

But that is significantly closer than any other LNG supplies, other than those coming from South America to the Gulf Coast.

"We are the closest possible source (of LNG) to the West Coast of North America and Mexico," McVeigh says.

Giving it the gas

McVeigh says Shell is looking at two proposed LNG terminals on the West Coast and will choose one as its shipping destination.

The two terminals under consideration include one in which Shell is a partner with Sempra Energy.

Sempra, which is the parent corporation of Southern California Gas Co. and San Diego Gas and Electric, the two biggest gas buyers in Southern California, is proposing a 1 billion-cubic-foot-per-day terminal in Baja, Calif., near Ensenada, Mexico.

The other terminal being considered by Sakhalin Energy involves another partner in the joint venture, Mitsubishi. Mitsubishi's Sound Energy Solutions has proposed a 700 million-cubic-foot-per-day terminal at the port of Long Beach, Calif.

The two terminals are among six proposed for the West Coast, of which only one or possibly two are expected to be built. All have met varying degrees of resistance from local communities as well as regulatory and funding challenges.

Indeed, a $1.5 billion project being developed by Houston-based Marathon Oil Corp. may be nearing cancellation. Company executives acknowledged to financial analysts in January that progress on the Tijuana Regional Energy Center in Baja has ground to a halt.

"We are carefully assessing our position in the light of circumstances," Marathon spokesman Paul Weeditz told media.

But Shell and Sempra already have government permits for their terminal in Ensenada, and Sempra plans groundbreaking in mid-2004.

Sempra already has signed contracts with BP to fill its half of the terminal with LNG from Indonesia. Shell has yet to contract its portion of the facility.

On the other hand, a terminal at Long Beach would be closer to California's natural gas pipeline systems, says McVeigh, who now lives in Moscow but still owns a home in Houston.

He says the company will commit to a project by the middle of this year.

"Sakhalin has arrived," McVeigh says. "It's not just a new project. It's not just a new frontier. It is the new source of energy for the Asia-Pacific region."

Even with fewer than four LNG terminals in operation, LNG imports to the U.S. have risen four times over the past three years as domestic production of natural gas has fallen by 8 percent.