Sakhalin action continues despite politics, finance, environmental issues
New partners, approvals paving way
Sakhalin I, II, and III blocks offshore Sakhalin Island, in eastern Russia. Activity has been slowed for several reasons, but may be picking up in the near term.
After some stalling due to tough cond-itions, both political and environmental, activity off Sakhalin Island appears to be resuming. The main activity has been focused on the Sakhalin I, II, and III blocks, but each has faced challenges that gradually being overcome.
The Sakhalin I block has experienced difficulties during the past year, but that seems to be in the past. The operating group of Exxon, SODECO, Rosneft, and SMNG, submitted a plan for a well to test the Chavyo oil leg. However, the Russian State Ecological Committee vetoed the well due to an interpretation of Russian law concerning the legality of discharging low-toxicity mud cuttings into the sea. Exxon challenged the ruling and threatened to pull out of the project. The company contended that it was consistent with the law and that three years of extensive monitoring demonstrated that low toxicity cuttings from water-based muds did not harm the Sakhalin environment.
Sakhalin I finances
But an underlying problem with the project, speculated as being the real issue for the suspension, was a lack of funds by one of the Russian partners. Reports indicate the Russian partners, Rosneft and subsidiary Rosneft-Sakhalinmon-eftegaz (RS), were badly hit in the 1998 oil crisis, but were pulling out of debt as a result of higher oil prices. However, the Russian companies made not be as out of debt as they seem.
RS announced plans to issue additional shares of the company, worth $20 million, but has yet to follow through. The shares were to be issued so that RS major shareholder, Yugshelf, a group of eight former top Rosneft managers holding 20% in RS, would have to repay over $15 million in debt owed by RS under Sakhalin I project financing. This would be through the buying of additional shares to keep its stake.
Yugshelf has since approached the courts to cancel the issue. A hearing is set for this month. Yugshelf did say that an agreement was signed, providing that all RS payments within the Sakhalin I project will be paid by Rosneft and that Yugshelf would pay its portion through Sakhalin I oil.
But help for Rosneft may be on the way. India's state-owned ONGC's foreign subsidiary, ONGC Videsh Limited, has expressed interest in taking a 50% stake in the field from Rosneft. This would entail ONGC investing $1.3 billion for exploration activities. The company has hired the investment bank JP Morgan to study the deal and advise them on the investment.
Despite the ecology and finances, the government and companies resolved the problems and were given the go-ahead in April and will resume drilling this month. The suspension is expected to have delayed the project by a year. First production is expected by next year. Sakhalin I involves three fields with recoverable reserves of 325 million tons of oil and 425 bcm of gas.
Sakhalin II partners
Now that the ice has cleared from the winter season, prod-uction has resumed from the Vityaz Production Complex on Sakhalin II, the only producing license to date in the Sakhalin Island area. Sakhalin II was put onstream in July of last year by Sakhalin Energy Investment Company made up of Marathon (37.5%), Mitsui (25%), Shell (25%), and Diamond Gas (12.5%). The field is producing oil from the Piltun-Astokhskoye Field through the Molikpaq (an arctic class drilling and production platform), a single-leg mooring buoy, and the Okha, a double-hulled, one million bbl capacity floating storage and offloading (FSO) vessel. The complex supports drilling year-round, but ceases production and exporting during the ice season.
But, bringing production back online now that the ice has cleared is a minor event compared to the major asset swap recently agreed to by some of the block's partners. Shell and Marathon have signed a non-binding letter of intent in which Shell will take Marathon's 37.5% interest in the $10 billion Sakhalin Energy Investment Company and additionally provide upstream and LNG services to the group. In exchange, Marathon will take Shell's 28% interest in the Foinaven Field, West of Shetlands in the North Sea, and a 3.5% overriding royalty on 100% of the production from eight blocks in the Gulf of Mexico, including the Ursa Field.
The agreement is expected to be officially signed in September and Shell will takeover Marathon's operations in the fourth quarter.
With all members in place, the partners plan to begin the next stage of development, which will deal with the gas, primarily from the other field on the block, Lunskoye. The group plans to obtain a sales contract for the gas from the field. It is speculated that Shell is targeting the revitalized Asian gas market for export and it was the main impetus for the deal with Marathon. A feasibility study is presently underway analyzing the transport of gas from Sakhalin to the Asian market.
Furthermore, by the end of the year, the company plans to begin the front-end engineering and design phase. This will include additional platforms on the Piltun and Lunskoye fields, and onshore processing plant in the north of Sakhalin Island, pipelines to ice-free harbors in the south of the island, and LNG plant and oil and LNG terminals in the south of the island. The group is targeting initial production for 2005. Additionally, the group plans to complete two appraisal wells this year on the Piltun-Astokhskoye Field.
Sakhalin III depths
Sakhalin III is the most stalled of any of the blocks. Sakhalin III is managed by the PegaStar consortium, consisting of Texaco, ExxonMobil, Sakhalinmoneftegaz, and Rosneft. Sakhalin III is unique from the other blocks in that it is the only area with an exploration play.
The main target is the Kirinsky Block, which covers some 7,000 sq km and holds one gas discovery - Kirin. The companies plan to target the undrilled South Kirinskaya prospect. South Kirin-skaya is thought to be predominantly oil, with reserves estimated to be up to 3.3 billion bbl, making it the largest oilfield discovered on the Sakhalin shelf. But, the companies estimate that if gas exists, it could hold up to 34.3 tcf recoverable.
As far as development, the companies estimate that due to the greater water depths in Sakhalin III, compared to I and II, up to 300 meters, the design would be different than that in the other blocks. The two possible plans include an ice-resistant steel structure or gravity-based concrete platform constructed at a local yard. The other plan is a possible subsea tie-back to an onshore processing facility or a floating production, storage, and offloading vessel or FSO.
While the prospects are hot, drilling has been stalled due to approval of the production sharing agreement (PSA) by the Russian government. However, in May of last year, a List Law was enacted for the block, which authorized the government to conclude the PSA. This law also covered the Exxon-run East Odoptinsky and Ayyashskiy blocks in the north of Sakhalin III.
Russian President Vladimir Putin and the Russian Parliament have recently approved legislation for PSAs aimed at encouraging more foreign investment. This could mean that approval of the PSA is just a few months away, with drilling underway by the end of the year.