Challenges for Sakhalin natural gas

Nov 22, 1999 01:00 AM

by David Flanagan

A recent Sakhalin Oil and Gas conference, held in London, drew wide participation from interested parties.
This island in the Russian Far East already has long history in the oil market, having been a centre for Russian crude extraction for many years. Its productive fields have to date been largely onshore, but these mature fields are now nearing the end of their lives. Hence the drive to develop the island's offshore blocks.
As with other Russian regions, Sakhalin's path to realisation of projects has proved slightly more rocky than expected. Aside from the legislative issues, more gas than expected has been found in the offshore areas. This is not necessarily a bad thing, of course; it simply changes the picture. The territory's energy position is proving to be quite similar in this respect to that of Azerbaijan, meaning that the issue of what to do with the gas has become a major question for the operators. While the Azerbaijanis and other Caspian suppliers such as Turkmenistan are looking to penetrate markets such as Turkey, the operators in Sakhalin are beginning their own search for gas buyers.
Their situation appears in one way simpler than that of Azerbaijan. Exports of Sakhalin gas would be essentially only a Russian issue. Numerous players and territories need not be involved, particularly where transportation is concerned; only Russia and its customer would play any role in the transaction.
Nevertheless, some legal problems have arisen, causing delays for Exxon's drilling program. The U.S. company is the majority shareholder in the first and third blocks of the Sakhalin-III concession and a minority shareholder in the Sakhalin-I project. These legal issues remain a point of discussion, and their swift resolution would greatly boost the prospects for the success of the next few tenders. Certainly, whether Exxon bids on the new projects will be influenced by progress on legislation.
As for potential markets, China and Japan may be the key targets for Russian gas. Korea may also be a potential customer but would probably be less significant. Russia's main competitors in these countries are established traders such as Indonesia and Malaysia. It should also be noted that demand for liquefied natural gas (LNG), which is not a particularly familiar market to the Russians, is significant in the region.
It should also not be forgotten that the potential target markets were only recently hit hard by economic woes. After the boom times of the late 1980s, East Asian economies suffered a major recession. Since the mid-1990s, industrial growth has been sluggish and remains weak. Hence, the timing is unfortunate for Russia, as industrial consumption of power and gas is not currently showing a strong upward trend.
Meanwhile, some observers have expressed concern about the prospect of China joining the World Trade Organisation (WTO), a development that may have far-reaching consequences for Chinese state-owned-enterprises, or SOEs. Some SOEs may be rationalised after China joins the WTO, and rationalisation could in turn lead to widespread closures or failures. Hence, demand for Russian gas in China may not reach the hoped-for levels.
Nevertheless, the gas is there. Provided bidders don't mind finding gas, there are further offshore blocks up for grabs in Sakhalin's offshore, the most enticing in terms of reserves being Sakhalin-III (Block 3), -IV, -V and -VI. Three further blocks - Sakhalin-VII, -VIII and -IX -- have lower estimated recoverable resources.

Source: NewsBase
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