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Shell Pushes Back LNG Deliveries from Sakhalin II

Shell doubled its costs estimates and pushed back the commercial service date for the Sakhalin II Phase 2 LNG project on Thursday. The company said in May that the project would cost $10 billion, but it now estimates its cost at $20 billion. LNG deliveries to the Costa Azul terminal in Baja California Norte, meanwhile, have been delayed until summer 2008 from November 2007.

The first three years of deliveries to Sempra Energy's Costa Azul import terminal are expected to average about 200 MMcf/d. Excess natural gas from the deliveries will be marketed in the United States by Shell's Coral Energy affiliate. Sakhalin Energy Investment Co. signed an agreement last fall to supply 37 million metric tons of LNG over 20 years to Shell Eastern Trading Ltd for the North American gas market. Reserves at Sakhalin II are about 1 billion bbl of oil and over 500 billion cubic meters (17.7 Tcf) of natural gas.

Shell said the cost and service estimates are still preliminary and remain subject to shareholder review and confirmation. Shell owns 55% of Sakhalin II. Its partners are Mitsui Sakhalin Holdings BV (25%) and Diamond Gas Sakhalin BV (20%).

"We are taking immediate action to address these issues -- and consulting and discussing with appropriate stakeholders to enable this critical and challenging frontier project to come to an acceptable completion," Malcolm Brinded, executive director for Shell's Exploration and Production business, said in a statement.

The project has more than 75% of its LNG capacity sold under long term contracts and is in negotiation with buyers for the balance of production capacity. The project is midway through construction. Significant milestones have been achieved at the LNG plant, onshore processing facility and the installation of the first gravity based structure offshore. Pipeline construction continues to progress and the second gravity-based structure is expected to be installed next month.

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