Make-or-break point approaches for $12-billion Sakhalin 1 and 2

Two world-class oil and gas projects offshore Sakhalin Island are progressing toward achieving first production. Major contracts have been awarded for the $1-billion four-phase Sakhalin 1, operated by ExxonMobil Neftegaz.

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Neil Potter
Contributing Editor

Two world-class oil and gas projects offshore Sakhalin Island are progressing toward achieving first production. Major contracts have been awarded for the $1-billion four-phase Sakhalin 1, operated by ExxonMobil Neftegaz. As for the Sakhalin Energy Investment Co.'s $8-billion Sakhalin 2 development, operator Shell is evaluating bids for the key components and expects to make awards shortly.

In both cases, several crucial stages have yet to be resolved with the Russian federal, regional, and local authorities. Foremost among these is the necessity to ensure security of tax exemptions in the original production-sharing agreements (PSAs) under a revised PSA model – the PSA chapter of the Tax Code – proposed by the Duma, Russia's lower house of parliament. The so-called "grandfathering" clause is aimed at maintaining the stability of the original PSA.

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Current licenses offshore Sakhalin Island.
Click here to enlarge image

At IBC's recent Sakhalin conference in London, Neil Duffin, president of ExxonMobil Neftegaz, told the audience, "The 'grandfathering' provision in this chapter is essential for the Sakhalin 1 project to continue to move forward." Other laws in need of amendment for the projects to proceed, according to the operators, include the anti-monopoly, gas supply, and draft trunk pipeline laws. These allow government authorities to determine tariffs, third-party access, and direct private investors to whom they must sell.

"The draft laws conflict with the investors' rights granted under the grandfathered PSA," said Steve McVeigh, chief executive of Sakhalin Energy. "The bottom line is that if the laws are not amended by the first quarter of 2003, then Phase 2 of the project will not proceed. We don't think the risks involved would warrant us going ahead. We cannot invest in something we have no control over."

PSAs as a concept continue to be criticized in some quarters in Russia, mainly on the grounds that they do not stipulate sufficient Russian content in projects. However, McVeigh countered, "Our PSA stipulates a 70% Russian content. The lack of Russian content is being used as a constant, but weak, argument to voice opposition to PSAs, both from groups within and outside the government." ExxonMobil points out that the value of contracts awarded to Russian companies for Sakhalin 1 will reach 2.7 billion this year.

Sakhalin 1

Sakhalin 1, on the northeast shelf of Sakhalin Island, comprises the Chayvo, Odoptu, and Arkulun-Dagi fields. Total recoverable reserves are estimated to be 2.3 Bbbl of oil and 17.1 tcf of gas. The first phase investment is estimated at around $4 billion. This involves production of Chayvo's oil, scheduled to begin in 2005, followed by oil from Odoptu in 2007, with plateau production building up to 250,000 b/d. The crude will be exported via a 24-in., 220-km pipeline to a marine tanker terminal at DeKastri on the Russian mainland. Last year, trials with a double-hulled tanker, escorted by two icebreakers, proved that operations could be conducted safely throughout the winter.

The 20-well, ice-resistant concrete platform Orlan, installed in waters 14 m deep, will serve as the offshore drilling and quarters complex and will also be used to develop the main Chayvo oil zone. Offshore processing facilities will be minimal, with full wellstream sent directly to the land-based processing plant. An onshore wellsite will be used to drill and produce 10 further extended reach wells in the northern flank.

Among the major contracts signed last year were:

  • Aviation services for five years – Sakhalinskiye Aviatrassy
  • Engineering and construction of on- and offshore pipelines – Nippon Steel Corp., with NS Nephtegazstroy and LUKoil Neftegaztroy as sub-contractors
  • Line pipe supply – United Metallurgical Co. and Pipe Metallurgical Co.
  • Orlan platform/drilling facility – Hyundai Heavy Industries
  • Chayvo land rig and 10-well extended reach program – Parker Drilling. The rig is designed to drill 8-10 km extended reach wells from an onshore site and should start operating early this year
  • Modifications to Orlan platform and topsides modules and tow-out to Chayvo field location in 2004 – Amur Shipbuilding
  • Lead detailed project engineering, procurement, and development management of Chayvo and Odoptu onshore processing facilities and drill sites – ABB, which will sub-contract the majority of the work to Russian companies.

The full-field development plan was submitted formally in November by the Authorized State Body, which is empowered to represent the Russian government on Sakhalin 1 matters.

"The project is at another critical juncture as we move into the technical and economic substantiation of construction stage (TEOC), which is a major task requiring hundreds of approvals from multiple agencies at the federal, regional and local level," commented Duffin. "We have a tight schedule, and we will require the government and regional approval process to work smoothly to conclude the TEOC by May 2003. Beginning primary construction in the summer of 2003 is essential to achieve first oil in 2005."

Phase 2 of Sakhalin 1 will target extension of plateau oil production and also gas exports via a subsea pipeline to Japan and other Asian countries in 2008. Phase 3 will develop production from Arkutun Dagi to extend the oil plateau, in addition to gas sales. Phase 4 will enable gas production to continue to beyond 2050.

The drive to sell the gas has been under way for some time. Discussions with potential customers in Japan are ongoing. ExxonMobil Neftegaz has set up an office in Tokyo and established a new company, Exxon Japan Pipeline Ltd. Last year, EJPL and a Japanese consortium completed a feasibility study for the Japan segment of the proposed pipeline. This would extend either 1,140 km from a point offshore Cape Soya, Hokkaido, to the suburbs of Tokyo, or 1,120 km to Niigata on the west coast. Another company will be formed to own, build, and operate the Japanese segment of the line. Other potential customers could be in South Korea, mainland Russia, and China.

LNG route

Phase 2 of Sakhalin 2 is competing for the same markets, but by exporting LNG, said McVeigh. "We are concerned about the cost of pipelines and believe that the way to sell the gas is as LNG. There is sufficient Asian LNG market growth, at least 5% a year in the long-term." Sakhalin Energy Investment Co. is in advanced negotiations with several LNG buyers in all five main Asian markets and also believes North America offers opportunities. But there is fierce competition from Indonesia, Brunei, Malaysia, Qatar, and Iran.

"If a 'future' gas pipeline to Japan ever becomes feasible," McVeigh added, "it only makes sense to begin from ice-free Prigorodnoye in the south of the island."

Under Phase 2, the LNG plant to be built at Prigorodnoye will produce 9.6 million metric tons/yr for at least 25 years and aims to capture a quarter of the east Asian market by 2010. It will be fed by an 800-km pipeline carrying gas from the 20-tcf Lunskoye field, starting in 2006.

By the end of this year, the Vityaz production complex, which came onstream as Sakhalin 2, Phase 1 in 1999, will have produced 4.7 million tons of oil a year from the Piltun-Astokh field via the Molipaq A platform. A $300-million project for infill wells and facilities for 144,000-b/d waterflood in the Astokh field is under way, with first injection scheduled for December 2003. The waterflood and power generation modules were fabricated at Amur Shipyards. Incremental secondary reserves are put at 260 MMbbl of oil.

Also under Phase 2, the 45-well slot concrete gravity base Piltun B platform will be installed on the Piltun sector of the field to produce 70,000 b/d of oil and 100 MMcf/d of gas. Production, currently confined by weather conditions to six months a year, will become year-round. On Lunskoye, a 30-slot platform will be installed with capacity for 800 MMcf/d of gas.

Originally, Shell had planned for this platform to be steel. But according to McVeigh, it opted instead for a concrete gravity structure, partly to extend Russian content. Also, there were doubts as to whether Russian companies could produce the steel of the required quality, on time. Both platforms will be built by Russian contractors in a new dock at the mainland port of Vostochny.

Forthcoming Phase 2 milestones are:

  • Government TEOC and PSA stabilization approvals – expected 1Q 2003
  • Lunskoye development date – to be declared 2Q 2003
  • Awards of major EPC contracts – 2Q 2003
  • Year-round oil production – 4Q 2005 to 1Q 2006
  • First gas – 3Q or 4Q 2006
  • First LNG deliveries – per customer requ-irements.

This timetable is contingent on a satisfactory resolution of the continuing conflicts with the Russian tax and legislative regimes.

Other prospects

Also at the IBC conference, there was an update on progress on some of Sakhalin's second generation prospects. A draft feasibility study has been drawn up for a new PSA on Sakhalin 3, the Karinsky block, which has been bogged down for years in the PSA approval process, with the aim of obtaining approval by federal law. The partners are ExxonMobil with 33.3%, ChevronTexaco with 33.3%, Rosneft with 16.6%, and PegaStar Neftegaz with 16.6%.

Tyumen Oil Co., the fourth largest Russian producer with 780,000 b/d of onshore oil and three refineries, is venturing offshore. Last year, it was awarded a five-year appraisal license for the Lopukovsky block in northern waters between Sakhalin 4 and Sakhalin 5. Previous 2D seismic surveys over this area have identified four multiple-fault structures – East Schmidt, Lopukhov, Baklania, and Trekhbratsk, with combined potential reserves of 956.3 MMbbl and 17.7 tcf. Tyumen plans a 3D seismic survey this year, followed by exploration drilling in mid 2004 and again in mid 2005.

On Sakhalin 4, an exploration well drilled by Rosneft in the Astrakhanov structure in 2000 proved disappointing. In 2001, Astrakhanov was included in an alliance agreement among BP, Rosneft, and Rosneft-SMNG. Their current plans include deciding whether to pursue further exploration of Astrakhanov and finding other prospects that would warrant formulating an exploration strategy.

Last July, Rosneft was granted a five-year exploration licence for the Kaygansko-Vasuykansky block in the southern part of Sakhalin 5. The main Sakhalin 5 Alliance, formed in 1998, comprises BP with 49% interest, Rosneft-Sakhalinmorneftegaz with 25.5%, and NK Rosneft with 25.5%. This team will purchase seismic data from a survey shot last year by Dalmorneftegaz and PGS over the whole of the Sakhalin V block. Depending on the analysis, drilling could start in 2004.

In 2001, Petrosakh CJSC, which has onshore production on Sakhalin and is managed by Alfa-Eco, obtained a license for geological exploration on the north area of Sakhalin 6 for five years. Rosneft is negotiating with Alfa-Eco to form a joint operating company. Current plans include processing and interpretation of seismic acquired last year. An application has been submitted for a license for geological exploration of the southern half of the block. Esti-mates put total recoverable reserves at 520 million tons of oil equivalent, of which one-third is oil and two-thirds gas. All geological exploration will be likely be performed by Russian companies.

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