#9 - JRL 7170
Energy giants begin tapping Sakhalin's vast oil and gas reserves
May 6, 2003
AFP

Against a backdrop of wintry tundra and the grey-blue hues of a frozen sea, a huge blue tower rises from a beach on the northeast coast of the Russian island of Sakhalin. On a brief flight by helicopter, the compact mass of an oil platform looms up amid the pristine white ice floes.

The drilling rig on the shores of the Bay of Chayvo and the Molikpaq platform are the respective first stages of two mammoth but distinct oil and gas projects for which infrastructure, gas pipeline construction and gas sale contracts worth billions of dollars should be signed in coming weeks.

Development and exploitation of the vast, untapped energy resources here could, over the next several decades, completely change life on this island in the remote Russian Far East, as well as the energy sourcing for countries such as Japan and South Korea.

They are the two most important foreign investment projects ever undertaken in Russia, officials of the consortia running them told reporters during a visit to Sakhalin.

On June 11, the first drilling spoil is due to reach the surface at the Chayvo Bay site known as Sakhalin I, where 138 workers, roughly a quarter of them expatriates, live and work.

The Sakhalin I project is operated by a consortium led by Exxonmobil, a group of 13 Japanese companies, SODECO, two Russian companies, RN-Astra and SMNG-Shelf and India's ONGC Videsh.

After drilling a first well, which runs out horizontally for 11 kilometres (seven miles) under the seabed to tap into the oil reserves, the blue drilling rig will be moved on rails to sink a series of 10 oil wells along the shores of the bay by 2005.

The world's most powerful horizontal drilling equipment, made by US company Parker Drilling, will then be dismantled and reassembled further north on the Odoptu field. Meanwhile, an offshore production platform will be moved into place at Chayvo the same year.

The consortium is planning to export natural gas to Japan by 2008 if it wins sufficient orders to justify going ahead with the construction of a gas pipeline. It also regards China and the Russian Far East itself as potential markets.

Another offshore site, Arkutun Dagi, to the east of Chayvo, will be developed with a view to production beginning in 2007.

The total reserves of the three sites are estimated at 307 million tonnes of oil and 485 billion cubic metres of gas.

The consortium will invest around 12 billion dollars in Sakhalin I over the course of its operational life. Russia stands to gain between an estimated 35 billion and 40 billion dollars in combined royalties, taxes and its shares of production income from now until the anticipated depletion of reserves in 2045.

Exxon, which accounts for some 30 percent of the capital spending on the project, is eyeing a 14 percent return on its investment given an oil price of 19 dollars a barrel.

Despite its name, Sakhalin II is actually the longer established of the two projects and differs from Sakhalin I in its planned method of exporting gas.

So far the project is embodied by the Molikpaq platform, icebound for six months of the year, and reached by helicopter. Up to 164 people work on the platform in extremely cramped conditions.

The winter months, when the oil tankers cannot reach the platform, are devoted to maintenance work.

Although the ice has not yet melted, activity there is already at fever pitch in a bid to squeeze in an extra two weeks of production by getting the oil flowing again by mid-May instead of the beginning of June, explained Jurgen Janzen, in charge of on site operations.

Russia, with long experience of working in arctic conditions, has a satellite ice-forecasting system intended especially for this purpose.

Sakhalin Energy, jointly owned by Anglo-Dutch oil giant Shell and the Japanese trading houses Mitsui and Mitsubishi, has said that between now and the end of June, it will conclude infrastructure construction contracts worth nearly nine billion dollars.

By 2007, two new oil platforms will be built, as well as a gas pipeline and an oil pipeline to run roughly 800 kilometres down the island, a land-based oil refinery, a liquefied natural gas (LNG) production plant and an oil exporting terminal in the south of the island.

Eighty percent of the current oil output of Sakhalin II -- which has total reserves estimated at one billion barrels of oil and 485 billion cubic metres of gas -- is exported to South Korea, which is also expected to buy gas from Sakhalin in order to reduce its dependence on Middle East suppliers and Indonesia.

Roughly half of the 9.6 million tonnes annual production of LNG due by 2007 will go by ship to Japan, equivalent to 15 percent of all gas going to Tokyo, said Sakhalin Energy's commercial director Andy Calitz. Tokyo Gas has already expressed its interest in buying the gas.

"Sakhalin Energy is in the midst of intense negotiations with Japan and (South) Korea over gas," said Galina Pavlova, director of the oil and gas department of the Sakhalin regional government. She added that an announcement was expected "in the next two weeks."

The Sakhalin I and II projects will be followed by other concessions: Sakhalin 3 to 7, for some of which work has already begun. British oil group BP, interested in the Sakhalin 4 and 5 concessions, is due to drill its first exploration wells in summer 2004, according to William Miller, vice-president of BP Exploration Operating Company Ltd.

"There are countless treasures to discover here," Pavlova said.