Western Australian Minister for Resources John Bowler told the WA Petroleum Club last night that developments at Sakhalin emphasised WA’s competitive advantage as a reliable source of LNG free of sovereign risk. He predicted that potential buyers would now look at Australian LNG even more favourably.

The cancellation follows weeks of arguments between Sakhalin Energy and the Russian Government over alleged environmental infringements at the project. The Government ordered a stop to oil production last week.

But various media reports and analysts have speculated that the move is an attempt by the Russian Government to force Shell to sell part of its stake in the project to state-owned Gazprom.

Gazprom had planned to swap half of a giant Siberian gas field for a 25% in Sakhalin-2.

But the plan ran into trouble after Shell said project costs would double to $20 billion, while the first LNG delivery would be postponed by six months to mid-2008.

Located in the country’s far east, the Sakhalin-2 LNG plant is proposed have a capacity of 9.6 million tonnes a year.

The plant is intended to supply customers in the United States, as well as Japan and other parts of Asia.

Shell has already spent upwards of $10 billion on Sakhalin-2 and has customers assigned to much of the initial production.

Sakhalin-2 already produces more than 70,000 barrels of oil per day for around half the year as part of Phase 1.

Shell is operator and has a 55% stake in the project, while other stakeholders are Japan’s Mitsui with 25% and Mitsubishi with 20%.