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International sanctions and lack of resources hit Russia's LNG plant expansion

MOSCOW (Reuters) - Plans for the expansion of Russia's Sakhalin-2 liquefied natural gas (LNG) plant have been put on hold, a potential setback to Russia's ambition to lift its global LNG market share. The main reasons for the hold-up are the lack of gas resources and international sanctions, the sources said, but plans of Russian gas giant Gazprom to boost its pipeline gas supplies to China, have also had an impact.

Equity holders in the Sakhalin Energy consortium include Gazprom which controls the project with a majority share, as well as oil major Royal Dutch Shell, Japan's Mitsui and Mitsubishi Corp.

Russia plans to raise its global LNG market share from less than 10% now to 20% by 2035, mainly thanks to cranking up of output by non-state producer Novatek and its partners in the Arctic.

Gazprom, Russia's sole exporter of natural gas via pipelines, has been slower in its LNG plans, focusing on pumping the fuel via pipes instead.

Sakhalin-2, off the country's eastern shores, is Russia's first LNG producing plant with a capacity of over 10 million tonnes per year. Its two production units, or trains, were launched in 2009 in strategic proximity to Japan, the world's largest consumer of the sea-borne LNG.

The consortium, Sakhalin Energy, has plans to expand and build a third train with a capacity of 5 million tonnes per year. Gazprom had said the expansion could happen in 2021.

"There have been no movements on the third line," a source from within the consortium said.

Shareholders have considered several options for the expansion: buying gas from the neighbouring Sakhalin-1 project led by ExxonMobil, developing new resources or a combination.

Yet, Sakhalin-1, where the state oil company Rosneft is also a shareholder, is aiming for its own LNG plant.

The talks about usage of Sakhalin-1 gas for the Sakhalin-2 LNG plant's expansion have dragged on for years.

Gazprom had initially planned to use resources from the Yuzhno-Kirinskoye field - yet to be commercially drilled and developed - for the Sakhalin-2 expansion.

Gazprom and Sakhalin Energy have not responded to requests for comment. Shell in Russia said the company remains committed to the expansion.

"The project is very robust from the technical and commercial point of view. However we need to confirm the feed gas supply source," it said in emailed comments.

"Only after such a source is determined, it will be possible to progress the project to FID and further construction."

In 2015, the United States restricted exports, re-exports and transfers of technology and equipment to the Yuzhno-Kirinskoye field, making it harder to develop, in response to Russia's annexation of Crimea from Ukraine a year earlier.

Gazprom has discovered another field, Yuzhno-Lunskoye, but the resources there are not enough for a third train at Sakhalin-2, according to a company source.

Next month, Gazprom plans to start landmark gas supplies to China via the Power of Siberia pipeline through which flows are expected to gradually rise to 38 billion cubic metres (bcm) per year during the next five years.

Other ways of pipeline gas delivery to China have been under discussion and one of the new possible routes of supplies is the existing Sakhalin - Khabarovsk - Vladivostok pipeline.

Russia wants to build a spur from the pipeline to China to the tune of 10 bcm per year but no deal has been clinched with China on that route yet. (Reporting by Vladimir Soldatkin, Maria Grabar and Olesya Astakhova Writing by Vladimir Soldatkin Editing by Katya Golubkova and Elaine Hardcastle)

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