Oct. 8 (Bloomberg) -- Sakhalin Energy, the operator of Russia’s only liquefied natural gas plant, is seeking price increases under a contract with Korea Gas Corp. that’s up for renegotiation next year, two people with direct knowledge of the situation said.
OAO Gazprom-led Sakhalin Energy plans adjustments to the oil-price linked contract after Brent crude prices jumped since the accord was signed eight years ago, the people said. Kogas, the world’s largest buyer of LNG, isn’t prepared to accept the increase, a third person said. All three people asked not to be identified because the negotiations are private and they aren’t allowed to comment publicly.
Ivan Chernyakhovsky, a spokesman for Sakhalin Energy based in Moscow, declined to comment when reached yesterday by phone. Kogas didn’t answer two calls yesterday to the switchboard of its headquarters in Gyeonggi, South Korea.
Asian buyers are seeking ways to lower costs, including by contracting LNG from North America, where production has jumped amid a surge in gas extracted from shale rock. A new wave of supply from 2015 is expected to remove the current market tightness as Australian projects start shipping the super-chilled fuel, followed by plants in North America and East Africa after 2018, according to the International Energy Agency.
The contract between Sakhalin and Kogas was first signed in July 2005. Brent crude averaged $50.47 a barrel on the ICE Futures Europe exchange in the first half of that year, compared with $107.88 a barrel for the same period in 2013.
South Korea paid $3.91 per million British thermal units for LNG from Russia in May, its cheapest supplies that month, according to the Asian nation’s customs data. That compares with $14.30 per million British thermal units paid by Northeast Asian buyers for cargoes delivered in the next four to eight weeks, according to a May 27 assessment by New York-based World Gas Intelligence. The cost has since gained 10 percent to $15.80, according to a Sept. 30 price from WGI.
Kogas is not keen to pay oil-linked prices as North American LNG becomes available at prices linked to the U.S. benchmark Henry Hub prices, one of the people said. The South Korean importer will buy 3.5 million metric tons a year of LNG from the U.S. Sabine Pass LNG project’s third production unit, or train.
Sakhalin Energy, whose other partners are Royal Dutch Shell Plc, Mitsui & Co Ltd. and Mitsubishi Corp., supplies 1.5 million tons of LNG to Kogas under a contract for the 20 years to 2028, with an option for an additional 0.5 million tons a year, according to the International Group of Liquefied Natural Gas Importers, a lobby group in Paris. Russia began to export LNG from the 9.55 million ton-a-year Sakhalin plant, located less than 100 miles (160 kilometers) from the northern tip of Japan’s Hokkaido, in February 2009.
Russia’s Energy Ministry is monitoring the talks between Sakhalin Energy and Kogas as part of the governing committee of Sakhalin-2, the LNG project being developed under a production sharing agreement, the ministry said in an e-mailed response to questions on Oct. 4. The ministry isn’t involved in the negotiations, it said.
“It is unlikely that the LNG supply contract will be terminated because the initiator of such a termination would need to pay a significant compensation to its counter agent,” the ministry said.
To contact the reporters on this story: Anna Shiryaevskaya in Moscow at firstname.lastname@example.org; Chou Hui Hong in Singapore at email@example.com; Jake Rudnitsky in Moscow at firstname.lastname@example.org