By Thomas Catan in Yuzhno-Sakhalinsk, Russia
Published: December 12 2005 22:00

Royal Dutch Shell plans a sharp expansion of liquefied natural gas production at its flagship Sakhalin-2 project.

The plan will be welcomed by investors hit by news of delays and spiralling costs at the project, and will add to Shell’s lead in one of the fastest-growing energy sectors.

The price tag for the project on the Russian island, which is set to deliver Russia’s first ever shipments of LNG, has doubled to $20bn (€17bn) and it is running about eight months late. However, demand for the LNG it will produce continues to grow in Asia and the US, and the price of gas is continuing to rise.

The two LNG production lines – or “trains” – under construction are due to produce 9.6m tonnes of super-cooled natural gas a year when they start up in the third quarter of 2008.

However, company officials said they could adjust the plant in two stages to increase production by up to 20 per cent. After that, Shell is seeking to add one or more trains to the plant, though managers stressed that a final decision had not been taken. The project could potentially double its LNG production.

“It’s highly likely there will be at least a third train and more,” said Ian Craig, chief executive of Sakhalin Energy, which operates the project. “The question is … when is the optimal time?”

Mr Craig said the company had studied adding more trains to the LNG plant and taken steps to ease the process.

For the moment, shareholders wanted the company to focus on delivering the first two trains, Mr Craig said. However, it will consider the expansion plans in a year’s time if the project remains on schedule. Any new trains would not come on line until at least 2011, he said.

Shell owns 55 per cent of the mammoth oil and gas project; Mitsui and Mitsubishi of Japan own the rest. Gazprom, the Russian gas monopoly, is also set to become a shareholder under a planned asset swap with Shell.

At present, Sakhalin Energy’s LNG plant will be largely fed by its own Lunskoye gas field, which is situated off the eastern coast of Sakhalin.

However, Russian officials have raised the possibility of a rival consortium led by ExxonMobil being forced to feed its gas into Sakhalin Energy’s liquefaction plant. The Exxon-led Sakhalin-1 project is currently seeking to sell its gas via a pipeline into China.

Sakhalin Energy officials said their existing two LNG trains would process only its own gas, but that an expanded plant could potentially take gas from Exxon’s project in the future.