Duma deliberations delay progress on Sakhalin development

Nov. 1, 1998
PART I: This is Part I of a two-part series on Russia's Sakhalin Island development programs. Part II will appear in the December issue. Oil prices and political stonewalling are holding back developments offshore Sakhalin Island. This was the plaintive theme raised by speaker after speaker at the recent 2nd Sakhalin Oil and Gas Conference in London, organized by IBC UK Conferences.

Gas projects may gain higher priority

Jeremy Beckman
Editor - Europe
PART I: This is Part I of a two-part series on Russia's Sakhalin Island development programs. Part II will appear in the December issue.

Oil prices and political stonewalling are holding back developments offshore Sakhalin Island. This was the plaintive theme raised by speaker after speaker at the recent 2nd Sakhalin Oil and Gas Conference in London, organized by IBC UK Conferences.

The situation is not unique to Russia, but the consequences are more troubling, with several multi-billion dollar investments at stake. However, there were indications from Russian officials at the conference that the vetoistic tendencies of the Duma are softening, which might allow more projects in the area to go forward.

The pace of oilfield developments will then be governed by oil price moves. Early pro duction is due next year from the Sakhalin II PSA's Molikpaq platform, but none of the three PSA consortia are presently inclined to rush through large-scale oilfield schemes. Gas is a different matter. Major infrastructure is expected to be in place by 2005, serving customers in China, Russia, and Japan.

Reserve levels

V. Z. Garipov, the first geophysicist to assume the high office of Deputy Minister of Fuel and Energy, outlined Russia's view of reserves on the 20,000-plus sq km Sakhalin Shelf. The current estimate is 720 million tons of oil and 2.3 tcm of gas in place. Northern Sakhalin holds 80% of these reserves, with eight fields discovered to date. The south and west Sakhalin basins look less promising, with no prospects of any large discoveries there, according to Garipov.

Sakhalin I, operated by Exxon Neftegas with partners Sodeco, Sakhalinmorneftegas, and Rosneft, was the first area on the shelf to be licensed. Garipov said the aim was to produce 288 metric tons of oil, 423 bcm of gas, and 700 metric tons of gas-condensate over an anticipated 40-year production period.

Capital investment of $15.2 billion would be recovered after 13 years, leading to a 23.8% internal rate of return. Overall payback would be $67.5 billion, with a net income to the State and Russian oil companies of $24.7 billion (not taking inflation into account).

Sakhalin II, the second PSA to be signed (in 1994), is the most advanced in development terms, with investment expected to reach $1.5 billion by 2000, Garipov said. Sakhalin III, although assigned, still awaits official clearance from the Duma. A second block in this license area was recently awarded to Exxon, which is currently in negotiation with Russian investors.

To the south, Sakhalin VI on the eastern part of the shelf is next in line for an award. The 700,000 sq km acreage contains 13 "quite promising structures", Garipov commented, housing 1,200 metric tons of gas and substantial condensate at a very conservative estimate. Sakhalin IV and V, on the north of the shelf, and VII and VIII to the south and west, will be tendered at a later date.

Progress on all three licenses currently operating has suffered from delays to fine-tuning of the Russian production sharing agreement (PSA) terms, still to be ratified by the Duma two years after the original PSA Law was adopted. The latest setback occurred this October when the bill had to be recalled because two of the 11 laws had amendments deemed unsatisfactory by the Duma.

The deadlock has forced the ministries concerned, plus the Sakhalin regional administration, to spend time pushing through special normative acts for each project concerning customs, tax regulations, and environmental safety. John Conlin, President of the Sakhalin Energy Investment Company, alluded to Sakhalin Governor Farkhtdinov's repeated journeys to Moscow solely to obtain signatures from high-level ministers.

According to Garipov, anti-crisis proposals, including changes to the Subsoil Bill, were due to be presented to the Russian Premier and Duma this month in an attempt to get the PSA law passed. He was hopeful of a breakthrough being made.

Drilling results

Rex Tillerson, President of Exxon Neftegaz, updated progress on Sakhalin I, located 45 km off the east coast of the island. Drilling across this acreage during 1977-89 yielded three significant finds - Arkutun-Daginskoye, Odoptu, and Chaivo. Following formation of the current consortium in 1995 and formal adoption of the PSA in 1996, exploration drilling resumed in October that year on Arkutun-Daginskoye. Appraisal studies to date put gas reserves across the three fields at 15 tcf. Of these, Chaivo is considered the core resource, said Tillerson, and the best defined, with the least complex geology.

Arkutun-Daginskoye comprises complex sand stone reservoirs featuring thin, stacked sands, and extensive faulting. Only limited appraisal was available on this field before the consortium got to work.

So far, results have not been encouraging. Oil is more prevalent, although appraisal well Dagi -15, also identified a gas cap (which was pro duction tested).

Results of the six wells drilled on this field since 1996 indicate lower oil reserves than originally expected, said Tillerson, particularly in the field's center. Three of these wells were productive, and one was dry. Although Dagi -15 did confirm expectations, analysis of the other wells only underlined the reservoir complexity. "The more we drill, the more complicated it becomes, which is the reverse of what you'd expect from appraisal. Our best geoscientists and engineers are working on this, but for the time being, timing of first oil remains uncertain."

Gas markets

Studies have been completed, however, for potential markets for the gas in the south of the island, mainland Russia, and the Far East. The plan now is to promote the gas development project to customers in China and Japan. Feasibility studies are under way for a pipeline route to the northern tip of Japan, subsequently branching out along Japan's east and west coasts. Also, various new LNG plant schemes are under discussion.

Environmental regulations have still to be established for oilfield operations in this part of Russia. Discharge of water-based mud drilling and cuttings is not prohibited, Tillerson said, "but some regulators still see ambiguity in Russia over this issue. The Russians have announced a framework, led by Exxon and Gazprom on the industry side, to establish consistent regulations. Analysis has confirmed that there has been no significant impact so far from Sakhalin I operations."

Marine life studies are under way. Two Rosneft-owned jackups and a floating drilling support warehouse owned by Sakhalinmorneftegas have been employed. Three-diminsional seismic was acquired by a joint venture between Sakhalin company Dalmorneftegeofizika and PGS-Nopec.

By the end of this year, the partners will have spent over $350 million on this project, Tillerson concluded. If oil prices stay low, the development will move slower than expected, he warned, but the consortium remain committed. "First gas is physically possible by 2005, but that's up to the market."

Early production

Sakhalin II's main discovered assets are two large offshore oil and gas fields - Piltun-Astokhskoye and Lunskoye. This September, the converted drilling unit Molikpaq was installed in preparation for Russia's first offshore oil production next summer, exported to a shuttle tanker via a newbuild SALM buoy moored two km away. This will be laid to rest on its side during the ice season, but will resume its vertical position once production re-starts.

The platform's depth has been extended by placing it on a 100 meter square, 15 meter high, donut-shaped spacer built by the Amur shipyard near Vladivostok (See April 1998 issue).

The Reuben Institute, known for its work on nuclear submarines, was responsible for the design. Spacer and platform were then floated over to Daewoo's yard in Korea for mating, followed by tow-out to the Astokhskoye Field in September. Prior to settling the platform on its seabed location, explosives were used to compact the sand within the platform's hollow core.

Vityaz is the name for this initial production complex. Development drilling was due to start last month, with four to five wells the target before the ice really sets in. With no access for supply vessels in these conditions, all materials must be on the rig before this happens. "It's a big logistical challenge," Conlin said.

The consortium has completed a major new housing complex on the island at Yuzhno-Sakhalinsk, a six-floor earthquake-resistant office complex, and a base camp at Nogliki for the Molikpaq staff.

Other members of the Sakhalin II consortium are Marathon, Mitsubishi, Mitsui, and Shell. A full-scale development plan for the two fields will ideally be submitted mid-1999. "However, we're not going to spend $1 billion on infrastructure for others to use in future - the risk will have to be shared. This is a key issue to discuss next year with all aspirant operators offshore Sakhalin Island," said Conlin.

On Block III, in central/northeast section of the Sakhalin Shelf, the PSA partners are contemplating what could be the world's largest production platform - assuming that the oil is in place.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.