Work at Sakhalin goes full speed ahead despite political wranglings

Nov 18, 2003 01:00 AM

Investment in greenfield oil and gas developments in Russia could be curtailed by the latest political wranglings, but work continues unabated on two huge projects in Sakhalin.
The International Energy Agency is warning that the latest government intervention with Yukos is putting out a negative message to future foreign investment, which is the key for new oil and gas projects in Russia.

The arrest of Yukos CEO Mikhail Khodorkovsky and the threat of revocation of Yukos production licences is forcing foreign oil companies seeking to invest in Russia to reassess their plans.
“Further foreign investment in Russian upstream, key to opening up of new greenfield producing areas, may be deferred until the dust surrounding the Yukos affair settles,” said the Paris-based organisation in its latest energy report.

ExxonMobil is thought to be interested in investing in Yukos, to take an equity stake in the oil company after it completed the merger with Sibneft, but analysts believe any potentialdeal is now on hold. The US major has stated it will continue to invest in Russia. The IEA has also warned the Yukos scandal could dent Russian oil output and exports in the medium term.
Together Yukos and Sibneft represent 27 % of 2003 production and have generated 42 % of Russian growth this year. All three of the world's super-majors are investing heavily in Russia. Shell and ExxonMobil have giant greenfield projects on Sakhalin Island and BP is investing in TNK-BP, a joint venture with Russian investors.

Shell and its partners in the Sakhalin II venture have sanctioned some $ 10 bn of investment to develop the Piltun-Astokhskoye and Lunskoye offshore fields in the Sea of Okhotsk. Sakhalin Energy, the Shell joint venture with Mitsui and Mitsubishi, already produces oil from the Piltun-Astokhskoye field with the Molikpaq production platform and Okha floating storage and offloading tanker.
The second phase of development will see a new platform for the Piltun-Astokhskoye field and one to develop the gas and condensate reserves on Lunskoye. Natural gas will be piped to a newly-built LNG plant on the southern tip of Sakhalin with exports going to Japan.

The consortium has already secured long-term orders from Kyushu Electric Power, Tokyo Gas and Tokyo Electric for LNG deliveries beginning in 2007 and awarded more than $ 2 bn in contracts to engineering and construction companies.
“The stage is now set for Sakhalin II to deliver first Russian LNG to the growing markets of Asia in just four years' time,” said Steve McVeigh, the consortium's CEO. His team is seeking project finance of up to $ 5 bn for the project.

ExxonMobil is handling a $ 12 bn project covering the Sakhalin I production sharing area with plans for first oil in 2005. The initial phase of the project consists of an oil-only development of the Chayvo and Odoptu fields with offshore production platforms. There will also be an onshore processing plant and an oil export system tied to a marine terminal.
ABB secured a $ 987 mm contract covering engineering and project management for the development and has sub-contracted several Russian contractors for the construction work. ExxonMobil also has plans to develop the Arkutun-Dagi gas fields with an export pipeline to Japan when it has signed up long-term gas contracts.

Longer-term investments are planned for other offshore areas in Russia, but progress remains slow because of the lack of speed on sanctioning licences by the Russian government. A lack of clear government policy on the possible opening up of the sector to private companies is hindering investment in new projects in frontier provinces, which includes the Pechora Sea, the Russian sector of the Caspian Sea and the Barents Sea.
Russia's Natural Resources Ministry has postponed plans to conduct an auction of offshore licences in the Barents Sea until 2004, despite potential investors hoping the process would start this year.

Ivan Glumov, deputy natural resources minister, said the auctions could not begin until the government approved a document outlining its global strategy for exploration and development of hydrocarbons on the continental shelf. This is unlikely to be swift as the document is being pushed around ministries and there are disagreements between the resources and economic development ministries on the price tag of offshore licences.
Mr Glumov's ministry wants to tender for blocks covering the North Dolginsky, South Dolginsky and West Matveyevsky areas, which the ministry estimates holds reserves of 6 bn boe.

The IEA thinks oil exports and production will suffer from deferred investment in these areas and onshore greenfield projects. TNK BP believes the problem is bottlenecks in the pipeline and terminal system.
“Russia needs new pipelines to maximise exports and TNK-BP is actively participating in these projects,” said Jonathan Kollek, vice-president of the Russian joint venture. He thinks one of the big problems is access from the Black Sea. “The bottleneck at the Bosporus will be getting worse as Russian production is rising and current facilities are being expanded. Market players will more actively be targeting the Baltic and this is why Primorsk's expansion and the construction of a pipeline to Murmansk are so important.”

Transneft opened the new terminal facilities at Primorsk in October, ahead of schedule, and its new capacity is 600,000 bpd. The Russian industry is beginning to go into its winter mode, where domestic demand increases so exports are lower than in the summer.
The IEA said Russian output climbed by 90,000 bpd in September to 8.77 mm bpd and the organisation is expecting a month-on-month growth of 70,000 bpd for October to 8.86 mm bpd. But exports are falling. Total former Soviet Union oil exports, including Russia, have fallen 100,000 bpd to 6.6 mm bpd in September and the IEA is expecting a further slide to 6.2 mm bpd in October.

Source: Gateway to Russia
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