Shell Group and partners to invest in tapping Russian oil

Shell Group and its partners agreed to spend $ 8.5 bn budget through 2014 to increase oil and natural gas production in Russia's far east as the companies look for customers in Korean, Japan and China. Partners in the Sakhalin-2 venture, which include Japan's Mitsui & Co. and Mitsubishi, approved the budget for tapping fields under the Sea of Okhotsk. The plans call for the group to spend more than $ 700 mm this year and announce the winner of a contract to build a LNG plant, which will compress gas for exports.
“We finally made a decision, which we should have made a year ago,” said Ivan Chernyakhovsky, spokesman for Sakhalin Energy Investment, the project operator.

Shell is competing with an ExxonMobil-led group that plans to spend $ 15 bn to produce oil and gas at nearby fields. Fields around Sakhalin Island have estimated reserves of 2 bn tons (14.7 bn barrels) of oil and 5.5 tcm of natural gas. The gas alone is enough to supply Asia for about 18 years.
Shell in April said it plannedto spend an additional $ 8 bn to develop the Sakhalin project. The company previously invested more than $ 2 bn. “We do not have customers for future LNG exports, but we are hoping to find clients before 2006 when we plan to start production,” Chernyakhovsky said.

Shell said in June it may buy a stake in Korea Gas and may invest in Korea Electric Power, the Asian country's top utilities, to increase the chances of securing contracts for gas sales from the Russian offshore fields. Officials from Tokyo Gas, Japan's largest gas supplier, and Japanese Bank for International Cooperation, a Tokyo-based state- owned bank, were scheduled to arrive in Yuzhno-Sakhalinsk, the city- base for the oil explorers, to negotiate LNG supplies to Japan, Pavel Buchnev, the Sakhalin region's official, said.
Sakhalin Energy is also in talks with UK, Japanese, Korean and Dutch banks as with the US Export-Import bank to secure funding for its expansion projects, Rein Tamboezer, president of Shell Exploration and Production Services, said. “It is still early to speak of who will be invited to participate in financing of the second phase,” he said.

The second $ 8.5-bn development phase will require construction of two more production platforms, oil and gas pipelines and gas processing facilities, said Chernyakhovsky. This will enable Sakhalin-2 to produce oil 12 months a year, instead of the current seasonal output. Sakhalin-2 has to be shut for about six months a year because of heavy ice in the sea.
Sakhalin Energy plans to produce 10 mm barrels of oil this year, down from 15 mm last year. “The output fell this year as the underground pressure has declined,” Chernyakhovsky said. “We are working to fix this problem and will pump water in the field to maintain output.”