Russian Sakhalin Projects- An Update

The island at the far eastern end of Russia. It is located between the Tatar Strait and the Sea of Okhotsk, north of the Japanese island of Hokkaido. The Kuril Islands forms the Sakhalin oblast (region). Sakhalin has an estimated 45 billion barrels of oil equivalent (BOE), making it one of Russia’s most important oil and gas producing regions and a prime target for foreign investment.[1]

Sakhalin-I:

The Sakhalin-I (Russian: ???????-1) project, a sister project to Sakhalin-II, is a consortium for production of oil and gas on Sakhalin Island and immediately offshore. It operates three fields in the Okhotsk Sea: Chayvo, Odoptu and Arkutun-Dagi. In 1996, the consortium completed a production-sharing agreement between the Sakhalin-I consortium, the Russian Federation and the Sakhalin government. The consortium is managed and operated by Exxon Neftegas Limited (ENL).[2]

The International Consortium Sakhalin-1 includes members from four countries:

The Project Operator is Exxon Neftegas Limited, an ExxonMobil Corporation (USA) subsidiary, which has a 30% stake in the Sakhalin-1 Project, The Russian party is represented by two Rosneft affiliates: RN-Astra (8.5%) and Sakhalinmorneftegaz-Shelf (11.5%) The Japanese SODECO Consortium has a 30% interestVidesh Limited ONGC, India's Oil and Natural Gas Corporation has 20% interest[3]. Sakhalin I consists of the development of the Odoptu field (oil and gas, discovered in 1977) and the Chayvo field (mainly gas, discovered in 1979). The large Arkutun Dagi field was initially discovered in 1989.[4]

Sakhalin-I's, located off the northeastern coast of Sakhalin Island in the Russian Far East, is being developed using a phased approach. The Sakhalin-1 Project yields significant benefits to Russia including billions of dollars in revenues, domestic gas supplies to Khabarovsk Krai, employment opportunities for Russian nationals and contracting companies, and infrastructure modernization.[5]Total estimated reserves of 2.3 billion barrels of oil (307 million tons) & 17.1 trillion cubic feet of natural gas (485 billion cubic meters)[6]

Sakhalin-II:

Sakhalin Energy Investment Company Ltd. (Sakhalin Energy) is established to implement the Sakhalin-2 project (development of the Piltun-Astokhskoye and Lunskoye fields)[7]. Sakhalin-II is one of the world’s largest integrated, export-oriented, oil and gas projects, as well as Russia’s first offshore gas project. Sakhalin Energy Investment Company Ltd., the project operator, is owned by Gazprom(Russia), Shell(Dutch-British), Mitsui(Japan) and Mitsubishi(Japan). The project infrastructure includes three offshore platforms, an onshore processing facility, 300 kilometres of offshore pipelines and 1,600 kilometres of onshore pipelines, an oil export terminal and a liquefied natural gas (LNG) plant.[8]An extensive expansion of the Sakhalin Island oil and gas project completed in 2009, heralded a new phase of production. The expansion involved an increase in crude oil production by way of new platforms and also the construction of a new liquefied natural gas (LNG) infrastructure for the export of natural gas to international markets. The project is led by the Sakhalin Energy Investment Company (SEIC) and required a total investment of over $20bn (the original estimate of $10bn was revised in 2005).SEIC is a joint venture between Gazprom (50% and one share) Royal Dutch / Shell Group (27.5%), Mitsui & Company (12.5%) and Diamond Gas-Mitsubishi Corporation (10%). Gazprom took a 50% stake in the project in 2006 (the Russian Government exerted pressure through environmental concerns) for BYR50m.[9]

Sakhalin-2 is a project of many firsts: the offshore oil platform Molikpaq was the first to be installed on the Russian shelf; the Lunskoye-A (LUN-A) and Piltun-Astokhkoye-B (PA-B) platforms are also the first of their type to be installed on the shelf, and the LNG plant is the first in Russia.Sakhalin-2 supplies about 4% of the world’s current liquefied natural gas (LNG) market. Japan, South Korea and China are the main customers for oil and LNG exports.[10]In 2018, Sakhalin Energy extracted 3.98 million tons (28.29 million barrels) of oil and 1.58 million tons (13.93 million barrels) of condensate and produced 11.41 million tons of LNG.[11]

Virtually all the gas from Sakhalin-2 has now been sold under long-term contracts to customers in the Asia-Pacific region and North America. There is potential to expand the project through the Area of Mutual Interest signed with Gazprom in April 2007, which provides opportunities for growth, including the purchase of third-party gas by Sakhalin Energy and the potential acquisition of exploration blocks in the area. It enhances the prospects for Sakhalin-2 to become a regional oil and LNG hub.[12]

In 2020, according to the International Financial Reporting Standards (IFRS), the revenues of Sakhalin Energy amounted to US$ 4,383 mln, and its total net income was US$ 1,080 mln.[13]

Oil:

In 2020, the company shipped about 37.9 mln bbl (4.8 mln tonnes) of Sakhalin Blend oil from the port of Prigorodnoye, which amounted to about 54.2 standard oil shipments (one standard oil shipment is 700.0 thousand bbl).The share of oil blend exported by Sakhalin Energy to the APR is about 0.3% of the total volume of oil consumed in the region.[14]

Liquefied Natural Gas:

In 2020, the company produced and shipped more than 11.6 mln tonnes of LNG (178.6 standard LNG shipments) from the port of Prigorodnoye (one standard LNG shipment is 65.0 thousand tonnes).In 2020, Sakhalin LNG accounted for more than 3.2% of global LNG demand, about 4.6% of LNG demand in the Asia-Pacific region, about 7.9% of LNG demand in Japan, about 4.7% of LNG demand in South Korea, more than 11.3% of LNG demand in Taiwan, more than 2.4% of LNG demand in China, and more than 1.6% of LNG demand in Singapore.[15]

Natural Gas:

In total, about 1,329.7 bln m³ of Sakhalin-2 gas was supplied to the Russian party in 2020.[16]

Sakhalin-III: The Sakhalin III project is of key importance to the development of the Sakhalin gas production center under the Eastern Gas Program. Gazprom owns licenses for three blocks within the project: Kirinsky, Ayashsky, and Vostochno-Odoptinsky. The Kirinsky block comprises the Kirinskoye field together with the Yuzhno-Kirinskoye, Yuzhno-Lunskoye and Mynginskoye fields discovered by Gazprom. Gas from the Sakhalin III project forms the main resource base for the Sakhalin – Khabarovsk – Vladivostok gas transmission system.

The first gas was extracted from the Kirinskoye field in October 2013, and commercial production started in 2014. For the first time in Russia, a subsea production facility was built to produce hydrocarbons in the harshest climates – even under ice – without building any platforms or other offshore structures.

Kirinskoye field was discovered in 1992. Its initial reserves (C1 category) amount to 162.5 billion cubic meters of gas and 19.1 million tons of gas condensate (recoverable). Its expected output is 5.5 billion cubic meters of gas per year.

Yuzhno-Kirinskoye field was discovered by Gazprom in 2010. Its ?1+?2 reserves amount to 711.2 billion cubic meters of gas, 111.5 million tons of gas condensate (recoverable), and 4.1 million tons of oil (recoverable). Its expected output is 21 billion cubic meters of gas per year.

Mynginskoye field was discovered by Gazprom in 2011. Its ?1+?2 reserves amount to 19.9 billion cubic meters of gas and 2.5 million tons of gas condensate (recoverable).

Yuzhno-Lunskoye field was discovered by Gazprom in 2016. Its ?1 reserves amount to 48.9 billion cubic meters of gas and 7.7 million tons of gas condensate (recoverable).

General Benefits:

·        Total estimated reserves of 2.3 billion barrels of oil (307 million tons) & 17.1 trillion cubic feet of natural gas (485 billion cubic meters)

·        Over 885.3 million barrels (118,2 million tons) of oil and condensate were exported.

·        939 billion cubic feet (over 27 billion cubic meters) of natural gas delivered to Russian Far East customers

·    State-of-the-art technologies and management processes are utilized to maximize production while maintaining the highest levels of safety, environmental, and operational performance

·        Environmental expenditures of nearly US$ 3.6 billion to protect local wildlife, habitats, and land use.[17]

Federal and local government benefits:

·        During the life of the project, over US$ 89 billion in taxes, royalty payments, and the state’s share of oil and gas is anticipated to be paid to the Russian state

·        Since its start-up, the Sakhalin 1 project has generated over $16 billion in state share of oil and gas, tax and royalty payments to the Federal and Regional Governments which includes more than $6.6 billion to the Sakhalin budget

·        US$ 100 million provided to Sakhalin Development Fund

·        US$ 40 million of bonuses have been paid to Russian Federation[18]

Russian content:

·        The Sakhalin-1 Consortium is committed to contracting with as many local companies as possible and providing jobs for as many Russian nationals as possible.

·        Over 700 Russian nationals employed directly by ENL

·        Since 2002, almost 300 Russian and Sakhalin citizens have been selected for special technical training and hired as technicians

·        Over US$ 16 billion in contracts awarded to Russian companies or joint ventures (over 70% of the total contracts awarded to third party vendors)[19]

Contractors, subcontractors and vendors:

·        Russian content is one of the key criteria in the Sakhalin-1 contracting process. While striving to maximize Russian content opportunities, however, preference is given to vendors that can effectively support the project objectives, including safety and health, environmental compliance, quality, maximizing profitability, and achieving scheduled completion.

·        To assist in maximizing the involvement of Russian contractors and vendors, Exxon Neftegas Limited, the Sakhalin Oblast Administration and the Ministry of Economic Development and Trade of the Russian Federation have established a Joint Committee on Russian Content.[20]

Infrastructure development:

·        In partnership with the Sakhalin Oblast, Khabarovsk Krai and district administrations, the Sakhalin-1 Consortium provides significant community investments. actively involved in improving public infrastructure such as hospitals, roads, bridges and airports to support Sakhalin-1 hydrocarbon operations which also benefits the community.

·        Over US$ 230 million of Sakhalin and Khabarovsk Krai infrastructure improvements which benefit local communities, including hospitals and clinics, roads, bridges, harbours, airports, and power and water facilities. Examples: construction of Yuzhno Women’s Clinic; repair and upgrade of Yuzhno-Okha federal road and bridges; upgrade of Nogliki Airport

·        Another significant community investment project was to restart the construction of the Yuzhno-Sakhalinsk Women’s Clinic. The clinic’s construction began in the late 1980s but was suspended in 1989 due to a lack of financing. Work resumed 17 years later after the Sakhalin-1 Consortium invested $3 million[21]

Community Contributions:

Over US $34 million of charitable contributions provided to local community organizations.In December 2012, Sakhalin Oblast Government and Sakhalin State University with Sakhalin-1 Consortium cooperatively established a new Oil and Gas Technical Institute (College) in Yuzhno-Sakhalinsk. This cooperation continued with the Sakhalin technical math and science center (STEM-center) creation targeted at the cross-disciplinary liaison between Sakhalin State University’s departments. About US$ 15, 4 mln have been provided to support this major educational project. As a part of the Signature contribution program, US$ 7.3 mln have been provided to local healthcare institutions, primarily to Sakhalin children hospital and Sakhalin oncological centre, to purchase innovative medical equipment thus improving local medical care.[22]

Small Business Support:

In 2004-2009 the Sakhalin-1 Consortium provided US$1.5 mln to implement a program targeted at small business support in Sakhalin Oblast and Khabarovsk Krai[23]

Conclusion:

Though legally classified as an "Extreme North" territory (denoting a remote region with extreme natural conditions that make for difficult living conditions and economic activity), the Sakhalin region is currently the most promising in the Russian Far East. It is the first place in Russia to produce results out of the Production Sharing Agreements (PSAs) signed between Russia and multinational consortia to develop oil and gas fields. The 1998 economic crisis did not have a significant negative impact on investment, signalling that the region is still attractive to Russia and the development of the region. the projects are shared between multiple companies from multiple countries. These projects are contributing substantially to the world energy needs, these projects were made possible with high international participation and investments. These projects gave a boost to the economic and infrastructure development in the region.

References

[1] Letman,Jon “ Sakhalin: Russia’s East Asia trump card” , 26 Aug 2011 available at https://www.aljazeera.com/opinions/2011/8/26/sakhalin-russias-east-asia-trump-card

[2] https://dbpedia.org/page/Sakhalin-I

[3] https://www.exxonmobil.ru/en-RU/Energy-and-technology/Energy/Sakhalin-1

[4] https://www.offshore-technology.com/projects/sakhalin/

[5] https://www.sakhalin-1.com/en-RU

[6] https://www.sakhalin-1.com/en-RU/Company/Who-we-are/Benefits-to-Russia

[7] http://www.sakhalinenergy.com/en/company/history/

[8] https://www.shell.com/about-us/major-projects/sakhalin/sakhalin-an-overview.html

[9] https://www.hydrocarbons-technology.com/projects/sakhalin2/

[10] https://www.shell.com/about-us/major-projects/sakhalin/sakhalin-an-overview.html

[11] https://www.gazprom.com/projects/sakhalin2/

[12] https://www.shell.com/about-us/major-projects/sakhalin/sakhalin-an-overview.html

[13] http://www.sakhalinenergy.ru/en/company/overview/

[14] Ibid

[15] Ibid

[16] Ibid

[17] https://www.sakhalin-1.com/en-RU/Company/Who-we-are/Benefits-to-Russia#GeneralBenefits

[18] Ibid

[19] Ibid

[20] Ibid

[21] Ibid

[22] Ibid

[23]Ibid

Pic Courtesy-NatalyA Letunova at unsplash.com

(The views expressed are those of the author and do not represent views of CESCUBE.)