Sakhalin LNG comes on stream to open new markets

Russia’s first liquefied natural gas plant comes on stream on Wednesday. A tanker with the first load of LNG produced on Sakhalin Island will set sail for Japan in March opening new market for Russian hydrocarbons.

On Wednesday Russia’s first LNG plant starts operation on Sakhalin Island. Cooled to liquid and transported on tankers – Russian gas is making its way to new markets. The first tanker with Sakhalin’s LNG will reach the coast of energy-hungry Japan in March.

Sakhalin Energy which operates the plant will export 60% of its annual output to Japan allowing the Asian nation to diversify its sources of energy supply. Sakhalin Energy CEO, Ian Craig, says the proximity of the project to Japan gives it a price edge, and its capacity to supply large volumes makes it a major player in Japans energy mix.

“One of the key advantages we have is we’re so close to Japan, our shipping costs are lower. So that gives us a competitive advantage. For gas we will be producing about 8% of their gas needs.”

Tatyana Mitrova, Head of the Centre for Energy Markets Studies says the cost of Sakhalin gas will be its major selling point across the Pacific.

“Sakhalin has very good costs, and what is more important transportation costs are lower. In the Pacific Ocean, where LNG prices are traditionally the highest in the world, so on these markets Sakhalin LNG has a very good margin.”

Long-term contracts with Tokyo will enable Russia to snap up market share from the largest LNG exporters in the region- Malaysia, Indonesia and Australia. The other 40% of Sakhalin’s output will go to South Korea and North America.

The Americas are also a key market for Russia’s second LNG project, the Shtokman field in the Barents Sea. Russia may face tough competition from LNG giants such as Qatar and Algeria. However lower production costs from production in this region may give Russia an advantage, according to Mikhail Krutikhin, Partner at Rusenergy.

“When Russia launches the project in the Barents Sea, there is such benefits as the lower temperatures in the area, and as compared to the Persian Gulf, the costs of producing LNG in that area will be about 10-15% lower.”

Gazprom plans to start LNG production on the offshore Shtokman filed in 2013. The gas giant is also looking at possible LNG projects on a frozen Arctic peninsula in Russia's northern Yamal region.