Rosneft files lawsuit against Sakhalin Energy

Market: Natural gas
07/07/14

Russia's state-run Rosneft registered an arbitration lawsuit today against Sakhalin 2 LNG plant operator Sakhalin Energy over denied access to a gas pipeline on Sakhalin island in Russia's far east.

Rosneft, with Sakhalin 1 operator ExxonMobil, plans to build a 5mn-10mn t/yr LNG plant in Ilyinskoye on Sakhalin's western coast. The firms are working on an engineering study and plan to make a final investment decision (FID) in early 2015. But to make the project viable, the firms need access to Sakhalin 2's 800km gas pipeline, which runs almost the entire length of the island.

State-controlled Gazprom, which holds 50pc plus one share in Sakhalin Energy, said it cannot provide access to the pipeline as it might need it for a planned 5mn t/yr third train at Sakhalin 2. The FID on the third train will probably be taken in late 2015.

Gazprom did not say whether Sakhalin Energy would provide pipeline access for Rosneft if does not take the FID. But Rosneft cannot wait for Sakhalin Energy's decision in 2015 because it plans to commission its first 5mn t/yr LNG train in 2018 and fulfil contracts to sell first LNG to Japan in 2019. Rosneft signed deals in June last year with Marubeni for 1.25mn t/yr of LNG on a long-term basis, while Japanese consortium Sodeco would take 1mn t/yr.

The Sakhalin 2 pipeline is big enough to accommodate 8bn-10bn m³/yr of gas from the Sakhalin 1 oil and gas field if Sakhalin Energy builds extra gas compressors. The gas is a key source for Rosneft's planned LNG plant, and would provide extra gas for the third Sakhalin 2 train. Rosneft has said it is prepared to finance compressor stations along the line.

But Gazprom still wants to persuade Sakhalin 1 operator ExxonNeftegaz to sell Sakhalin 1 gas for the planned third Sakhalin 2 train. The ExxonMobil subsidiary for its part supports Rosneft's plan to build a separate LNG plant on the island.

Rosneft and Gazprom have been wrangling over Sakhalin 1 gas for years, hindering the implementation of a new LNG project on the island, which is well placed to export to Asia-Pacific buyers. But the Kremlin is keen to increase LNG exports to Asia-Pacific, meaning that a dispute between two state-controlled companies is likely to be resolved with government intervention.

Deputy prime minister for energy Arkady Dvorkovich said in June that the government could step in if Rosneft and Gazprom fail to agree.

Delays to Rosneft's LNG project would benefit Gazprom's other Vladivostok LNG project. Gazprom is targeting start-up of the first 5mn t/yr train at Vladivostok in 2018, but is unlikely to meet that target because it has not sold the LNG production yet.

Separately, Sakhalin Energy signed a final agreement today with Russian state-owned shipbuilder and operator Sovcomflot to build and operate three ice-breaking ships that can be used all year around. The ships are needed for Sakhalin 2's own needs. The 20-year agreement is a follow-up of an initial agreement signed in April this year.

Sakhalin Energy comprises Gazprom (50pc plus one share), Shell (27.5pc minus one share), Mitsui (12.5pc) and Mitsubishi (10pc). Sakhalin 1 comprises ExxonMobil (30pc), Rosneft (20pc), Sodeco (30pc) and India's ONGC (20pc).

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