HYDROCARBONS

Other than hydrocarbons, Sakhlin has no effective industrial base. Fishing is still popular, but does not form an industry as such, leaving focus on developing the enormous Hydrocarbon deposits, under Production Sharing Agreements (PSAs) between agents of the Russian Government and international oil and gas firms. Sakhalin’s estimated reserves run to 14 billion barrels (2.2 km³) of oil and 96 trillion cubic feet (2,700 km³) of gas, presently being developed under production-sharing agreements with ExxonMobil (Sakhalin 1) Shell, Mitsui and Mitsubishi (Sakhalin 2).

The PSAs for Sakhalin 1 & 2 were signed in 1996, and anticipated capital expenditure of some 16 billion dollars, though this doubled to $37 billion as of September 2006, triggering Russian governmental opposition, as costs are written off against tax under the terms of the agreement. 

Development the necessary infrastructure also required an estimated $1 billion (US) to upgrade the island's infrastructure: roads, bridges, waste management sites, airports, railways, communications systems, and ports.

The state is building a 136 mile (219 km) pipeline across the Tatar Strait from Sakhalin Island to De-Kastri on the Russian mainland, where oil and LNG will be loaded onto tankers for transport to East Asian markets (see Map)

Sakhalin Energy, operating the Sakhalin 2 PSA is building two 800 km pipelines running from the northeast of the island to Prigorodnoye (Prigorodnoe) in Aniva Bay at the southern end. The consortium will also build the first ever liquefied natural gas (LNG) plant to be built in Russia. The oil and gas is also bound for East Asian markets.

Sakhalin II has come under fire from environmental groups, namely Sakhalin Environment Watch, for dumping dredging material in Aniva Bay. The groups were also worried about the offshore pipelines interfering with the migration of Grey Whales off the island. The consortium has (as of Jan 2006) re-routed the pipeline to avoid the whale migration.

In 2000, the oil and gas industry accounted for 57.5% of Sakhalin's industrial output. By 2006, it is expected to account for 80% of the island's industrial output. Sakhalin's economy is growing rapidly thanks to its oil and gas industry. By 2005, the island had become the largest recipient of foreign investment in Russia, followed by Moscow.

Unemployment in 2002 was only 2%. However, all of the oil and gas is for export and none is available to the island's population.

As of 18 April 2007 Gazprom took 50% plus one share interest in Sakhalin II by purchasing 50% of Shell, Mitsui and Mitsubish's shares. 

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Sakhalin Energy Resumes Construction of Pipelines under Sakhalin-2 Project (01.08.2007) Sakhalin Energy Investment Company Ltd., the operator of the Sakhalin-2 project, has resumed the construction of the oil and gas pipeline across tectonic fracture No 3, a seismically hazardous zone near the Yasnoye village in the Tymovsk district, after the Federal Environmental, Industrial and Nuclear Supervision Service (Rostekhnadzor) approved the changes made in the project and allowed Sakhalin Energy to continue the construction.
It was reported last week that the service’s department for the Sakhalin Region suspended the construction of the main pipeline from July 23 to August 10 because of violations in laying drainage pipes, until an expert examination along the route would be completed.
Experts from independent company Oil and Gas Security – Energy Diagnostics (NGB Energodiagnostika), who conducted the examination, concluded that the improved design solution increased the industrial and environmental safety of the pipelines

Rostechnadzor Files New Claims Against Sakhalin Energy (26.07.2007) The construction of an 800 km oil-and-gas pipeline in the tectonic zone of Sakhalin Island under the Sakhalin-2 project by Sakhalin Energy has been suspended. To protect two pipeline sections from an earthquake in an area not far from the village of Yasnoye, Tymovsk District, the workers dug a drainage system away from the initial pipeline route. The Sakhalin department of Russia’s Federal Service for Environmental, Engineering and Nuclear Supervision (Rostechnadzor) regarded this as a violation.
The construction will be suspended near Yasnoye until the drainage system is adjusted to the technical plans.

All Three Platforms Installed for Sakhalin-2 (05.07.2007) Sakhalin Energy Investment Company Ltd. has successfully installed the topside of the Piltun-Astokhskaya (PA-B) oil and gas platform at the Piltun-Astokhskoye field. It is the third platform envisaged by the Sakhalin-2 project off the Sakhalin coast. The next step will be to connect all the systems and pipelines. Production at the field will begin after the start-up work is over. Oil from the PA-B platform will be transported to the terminal in Prigorodnoye, the Korsakov District, via a network of offshore and onshore pipelines. Production on the platform will start in 2008.

Sakhalin Registers Oil Production Record (05.07.2007)  An oil production record was registered on Sakhalin in the first six months of 2007. The output for the period was 6.8mn metric tons of crude, up 600,000 metric tons (4.4mn barrels) from the entire 2006, said the Sakhalin Region’s administration. The leader in oil production is US Exxon Neftegas Limited, a subsidiary of US oil major Exxon, the operator of the Sakhalin-1 offshore project, which produced 5.58mn metric tons at the Chaivo field in the Sea of Okhotsk. The rest was produced by Sakhalinmorneftegaz, Sakhalin Energy and Petrosakh.
Experts say that this year’s output on Sakhalin will total 15mn metric tons.

Statoil to Join Gazprom Neft in Sakhalin’s Lopukhovsky Block (17.07.2007) The Federal Agency for Subsoil Use (Rosnedra) has decided to prolong the exploration licence of TNK-Sakhalin, a subsidiary of Gazprom Neft, for the Lopukhovsky Block between the Sakhalin-4 and Sakhalin-5 projects in Russia’s Far East until 2010.
TNK-Sakhalin is the operator of the Sakhalin-4 project, in which Gazprom Neft and Sakhalin Oil, controlled by the Sakhalin regional administration, have 75% and 25% stakes, respectively.
The company, which wants to work only in one of the block’s parts, has decided to share production risks with Norway’s Statoil. According to analysts, Statoil will be invited to join Gazprom Neft on the same conditions Gazprom has offered to France’s Total in the Shtokman gas condensate project in the Barents Sea

Gazprom Plans to Bid for Sakhalin-3 (10.06.2007) Gazprom’s deputy CEO Alexander Ananenkov said the state-owned gas giant would bid for Sakhalin-3 licences, because it needs resources to supply the Far Eastern city of Vladivostok with gas. The Khabarovsk-Vladivostok pipeline will be completed in 2011, but Gazprom does not have enough resources to satisfy local consumers. The Sakhalin-3 oil and gas offshore fields contain estimated 800mn metric tons of oil and 900bn cu m of natural gas.
Russia’s state-controlled oil major Rosneft holds the licence to develop the Veninskoye field.
Exxon, Texaco and Mobil won the tender to develop the Kirinskoye, East Odoptu and Ayashskoye areas in 1993, but never obtained the licences because of the changes in the Russian PSA laws.
Those fields are currently registered as non-licensed stock, and Russia’s Federal Agency for Subsoil Use (Rosnedra) is expected to hold another tender before the end of this year

Platform Topsides Ready for Shipment to Sakhalin (30.05.2007) On May 29, 2007 Sakhalin Energy and Samsung Heavy Industries held a ceremony at the construction yard on Geoje Island in Korea to celebrate Piltun-Astokhskoye (PA-B) topsides’ completion and sail away to the North of Sakhalin. What we celebrate today is a remarkable milestone in the development of Sakhalin II Phase 2, one of the largest integrated oil and gas projects in the world,” said Chris Finlayson, Chairman of the Board of Directors of Sakhalin Energy.
The PA-B Platform is an integrated oil and gas pumping facility fitted out with drilling equipment which will be used to pump oil and associated gas at the Piltun area of the Piltun-Astokhskoye field. The platform is designed to operate in all seasons in severe climatic conditions, resistant to waves, ice and seismic impacts. It is also earthquake-resistant like the Lunskaya-A platform.

Rosneft, Sinopec Agree on Stakes in Sakhalin-3 (02.04.2007) Rosneft and China's Sinopec have signed a shareholder and operating agreement on joint exploration and development of the Veninsky block off the coast of the Far Eastern island of Sakhalin under the Sakhalin-3 project. The two companies' 100% subsidiaries, Rosneft International Limited and Sinopec Overseas Oil and Gas Limited, will own the project holding company, Venin Holding Ltd., which was set up last October, the Russian state-controlled oil company said in a statement. The holding will be the only shareholder in Venineft, which holds the licence for the block and is the project's operator. Rosneft will hold a 74.9% stake in the project and Sinopec 25.1%.
The block's reserves have been estimated at 169.4 mln metric tons of oil and 258.1 bln cu m of gas. The licence area covers about 5,300 sq km (2,046 sq miles) in the Sea of Okhotsk with depths varying from 25 m to 150 m.

Russian-Chinese JV to Appear on Sakhalin (27.03.2007) Russian state-controlled oil company Rosneft and China's Sinopec are in talks to set up a joint venture on Sakhalin. Both companies are members of the Sakhalin-3 oil and gas offshore project. Last summer, the Chinese offshore platform Kantan 3 drilled an exploration well off Sakhalin and found potentially productive oil- and gas-bearing formations on the South Aiyashskaya structure in the Sea of Okhotsk. Ivan Malakhov, governor of the Sakhalin Region, said Sakhalin-3 could begin commercial production in the next decade. Rosneft's president Sergei Bogdanchikov has repeatedly said the same. The recoverable reserves of the project are estimated at over 800 mln metric tons of oil and almost 1 trln cu m of gas.

Japan Receives More Oil from Sakhalin Shelf Than Any Other Country (27.02.2007) About 10 mln metric tons of oil produced on the Sakhalin shelf in Russia’s Far East went to Japan, more than to any other country. Japan first received hydrocarbons produced in the Sea of Okhotsk in 1999. Ivan Malakhov, the Sakhalin Region’s governor, said Sakhalin should supply not only oil and natural gas to the international market, including Japan, but also their high added value derivatives. Malakhov has arrived in Tokyo, where he intends to discuss with the Japanese partners deep conversion of Sakhalin hydrocarbons on the Sakhalin Island.

Natural Resources Ministry to Launch Sakhalin-3 in 2007 (15.02.2007) The tender for geological exploration within the Sakhalin-3 oil and gas project in the Far East may be announced already this year, said Sakhalin Region governor Ivan Malakhov. The Natural Resources Ministry is ready to launch the project this year, he said, adding that it is important for the island in terms of employment and more efficient use of infrastructure. Sakhalin-3 envisages the development of the Kirinsky, Veninsky, East Odoptu and Ayashsky hydrocarbon blocks in the Sea of Okhotsk. Their oil reserves are estimated at over 800 mln metric tons and gas reserves at over 900 bln cu m. In 2003, Rosneft acquired a licence for the development of the Veninsky block.

Sakhalin-1 Project Production Goal Achieved (15.02.2007) Exxon Mobil Corporation has announced that phase one of the Sakhalin-1 offshore project in Russia’s Far East, led by its subsidiary Exxon Neftegas Limited, and including affiliates of Rosneft, RN-Astra and Sakhalinmorneftegas-Shelf, Sakhalin Oil and Gas Development Co., Ltd. and ONGC Videsh Ltd., has reached its targeted peak production rate of 250,000 barrels (34,000 metric tons) of oil per day. The Sakhalin-1 project is being developed under a production sharing agreement and includes three offshore fields: Chayvo, Odoptu and Arkutun Dagi. Their potential recoverables stand at 307 mln metric tons of oil and 485 bln cu m of gas.

Russian Railways to Invest $38 Mln in Sakhalin’s Rail Infrastructure (13.02.2007) Rail monopoly Russian Railways (RZD) will invest Rbs1 bln ($38 mln) in the rail infrastructure of Sakhalin in Russia’s Far East in 2007, notably in the modernisation and commissioning of two detours and five bridges of the Sakhalin Railways, and in continued modernisation of Tunnel 21. In July 2002, the Transport Ministry and the administration of the Sakhalin Region agreed to adjust Sakhalin’s narrow-gauge railway lines to the generally used 1520-mm gauge. Russian Railways was set up on October 1, 2003 at the Transport Ministry. It has 855,000 km of railways and is 100% owned by the state. The company was ranked third of Russia’s top enterprises in 2005.

Russian Deputy Prime Minister Invites Indian Capital to Sakhalin-3 (23.01.2007) “Russia would like Indian capital to take part in the implementation of the Sakhalin-3 project and the development of the Vankorskoye deposit in (Siberia’s) Krasnoyarsk Territory,” Russian Deputy Prime Minister Sergei Ivanov told Indian businessmen at a meeting.
Sakhalin-3 participants ExxonMobil and Russian state-owned oil company Rosneft expect to start production under the project, which stipulates the output of 16.3 bln cu m of gas and 2 mln metric tons of gas condensate, in 2014.

Fitch on Changes in the Shares of Sakhalin-2 Partners (20.12.2006) The sale of a stake in Sakhalin-2, one of the largest oil and gas projects (located in Russia’s Far East), “may hit Shell’s reserve replacement strategy,” international rating agency Fitch says in a statement. Shell’s share in the project is expected to go down from 55% to 35%, whereas the shares of its Japanese partners – Mitsui & Co. and Mitsubishi Corp. – will decrease to 15% and 10% respectively. This will give Gazprom control of the project.
Gazprom’s acquisition of the stake will further strengthen the structure of the company’s business, because this will allow it to join an LNG project and acquire the badly needed experience in this high-tech sector, Fitch says.

Russia Endorses Spending Increase on Sakhalin-1 (15.12.2006) Russia has endorsed an increase in spending on the Sakhalin-1 oil and gas project off Russia's Pacific coast from $12.8 bln to $19.3 bln, the Industry and Energy Ministry said in a statement. The authorities also endorsed the programme of work and the cost estimate for 2007 totalling $1.193 bln. The budget presented by the project's operator, Exxon Neftegas Ltd., was reduced "by tens of millions of dollars" after the talks. The document also took into account non-refundable expenditures of $112 mln.
Sakhalin-1 is being developed under a production sharing agreement that came into force in 1996. The recoverable reserves of its fields total 307 mln metric tons of oil and 485 bln cu m of gas. The project's participants are Exxon Neftegas (30%), Rosneft (20%), Indian ONGC (20%) and Japanese Sodeco (30%).

Shell, Mitsui and Mitsubishi to Sell Gazprom 50% in Sakhalin-2 (12.12.2006) All three investors in the Sakhalin-2 project – Anglo-Dutch concern Royal Dutch Shell and its Japanese partners Mitsui and Mitsubishi – will sell Gazprom part of their stakes, giving the Russian gas monopoly a controlling stake in Russia’s largest oil and gas PSA-project, the Financial Times reported.
According to the newspaper, Shell will sell 30% in the Sakhalin-2 project operator and retain 25%, while Mitsui and Mitsubishi, which now control 25% and 20% respectively, will sell Gazprom 10% each. The deal, which FT’s anonymous analysts have estimated at $4 bln, will be paid in cash, the newspaper reported.

Shell Cedes Control over Sakhalin 2 to Gazprom (12.12.2006) Shell has agreed in principle to cede control over the Sakhalin 2 project to Gazprom. According to unofficial sources, the Anglo-Dutch company agreed to keep only a blocking stake after talks between its CEO Jeroen van der Veer and Gazprom CEO Alexei Miller.
Analysts believe that offshore fields in Russia will in the future be developed by a united state-owned company, which could comprise Gazprom, Rosneft and Zarubezhneft. Under a new strategy, which was discussed at the meeting of the Russian Security Council, this would be more in line with Russia's national interests, they say.

Rosneft, BP to Cooperate on Arctic Shelf (01.12.2006) Russian state-controlled oil company Rosneft and British Petroleum (BP) have reached agreement on joint operations on the Russian Arctic shelf. They will most likely apply the same scheme they used in their cooperation on the Sakhalin projects: Rosneft will act as a mineral user and BP will finance the projects, which are regarded as the most expensive and risky in the sector. The sector’s experts are unanimous that the only possibility for BP to get access to shelf projects is to assume all the risks connected with these projects.
The Arctic shelf is considered a promising region but has harsh operating conditions and is not properly explored. According to Russia’s Ministry of Natural Resources, reserves of the Barents and Kara seas are estimated at 8.2 bln metric tons of conventional fuel, and their resources at about 56 bln metric tons.

Russian Government to Take Over Distribution of Gas Produced under Sakhalin-1 (02.11.2006) The Ministry of Industry and Energy has announced that the Russian government and gas monopoly Gazprom will determine where to export gas produced under the Sakhalin-1 project run by US ExxonMobil. However, Sakhalin-1 is being developed under a production sharing agreement, and therefore the decision should rest with its operator, Exxon Neftegas. Branch experts say officials will not allow the operator to sell gas to China, but will instead seek to divert it to the Khabarovsk Territory.

Kremlin Offers Shell and Exxon to Stick to Original Cost Agreements or Sell Up and Go (05.10.2006) Royal Dutch Shell should better sell its share in the Sakhalin-2 project to a third party at a profit if Russia’s terms and conditions do not suit it, Arkady Dvorkovich, head of the Russian President’s expert department, said in an interview with The Times. "Russia is demanding that Shell and Exxon either stick to original cost agreements, return to the Kremlin and renegotiate the deal’s terms, or sell up and go," The Time writes. "As far as Sakhalin-2 goes, you know which side started changing the terms and who asked for expenditure to be doubled," Mr Dvorkovich told The Times. Mr Dvorkovich said: "If it’s more beneficial to work under the PSA, (Shell) should do that, rather than switch to a new legal regime. If neither of those options are acceptable, it may be more beneficial to sell their interest to a third party."

Sakhalin Energy Finds Buyers for 98% of Future LNG (27.09.2006) Sakhalin Energy, which operates the international energy project Sakhalin-2, has found buyers for almost 98% of liquefied natural gas that will be produced at a future plant, said its CEO Ian Craig. The project estimated at $20 bln by its participants – Anglo-Dutch Royal Dutch Shell (55%) and subsidiaries of Japan's Mitsui & Co. (25%) and Mitsubishi Corp. (25%) – has come under pressure from Russian officials, who accuse Sakhalin Energy of violating environmental legislation.
Mr Craig said that the company had almost completed drawing an order portfolio. After the last contract is officially endorsed, Sakhalin Energy will have long-term contracts for the export of 98% of LNG produced by the plant's first and second units, he said. The remaining 2% will be used as a reserve to ensure flexibility of supply and for spot sales.

Rosnedra to Choose Winner of Tender for Sakhalin-1 Exploration Licence (22.09.2006) The Federal Subsoil Use Agency (Rosnedra) is to sum up the results of the tender for an exploration licence under the Sakhalin-1 project by the end of the year, said Alexei Varlamov, deputy minister of natural resources. He said the ministry would choose a development scheme only after the conclusion of exploration at the undistributed blocks.
Mr Varlamov explained that if new fields were confirmed, an auction for a development licence would be held. If the exploration traces extensions of the distributed fields, another auction would be held, with the current operator granted a handicap.
Sakhalin-1 is an international consortium created to develop three oil and gas fields on the northwest shelf of Sakhalin with recoversables assessed at 307 mln metric tons of oil and 485 bln cu m of gas. Planned investment into the project is about $12 bln.

ExxonMobil to Increase Spending on Sakhalin-1 by 32% (20.09.2006) ExxonMobil intends to increase spending on Sakhalin-1 by 32%, from $12.8 bln to $17 bln, Exxon spokesman Bob Davis said. He explained the growth by increased spending owing to inflation and dollar rate fluctuations. Sakhalin-1 includes three oil and gas licence areas – Chaivo, Arktun-Dagi and Odoptu-More – that are being developed by a consortium of investors on conditions of production sharing. The consortium includes US ExxonMobil (30%), Japanese Sodeco (30%), India’s ONGC (20%), and Russia’s Rosneft (20%). The deposits’ recoverables amount to 307 mln tons of oil and 485 bln cu m of gas.
As of now, the consortium is working on the first stage of the Chaivo field. It should start export deliveries from the De Kastri terminal in October. By the end of the year, oil output under Sakhalin-1 is to reach 250,000 bpd.

Gazprom Halts Negotiations with Shell over Uncertainty with Sakhalin-2 (19.09.2006) Russian energy giant Gazprom has halted asset swap negotiations with Shell due to its concerns about the Sakhalin-2 project, said Gazprom spokesman Sergei Kupriyanov. "Our negotiations on asset swap with Shell have been marking time for over a year since the proposed changes in the economic parameters of Sakhalin-2 have not been coordinated with the Russian government," Mr Kupriyanov said. "We cannot continue the negotiations in the circumstances." Initially, Sakhalin-2 costs were approved at $12 bln, but last year Sakhalin Energy, the project’s operator, said the budget should be increased to $20 bln.

Natural Resources Ministry Annuls Positive Conclusions on Sakhalin-2 Feasibility Study (19.09.2006) The Ministry of Natural Resources has examined the protest of Alexander Buksman, Russia’s first deputy prosecutor general, against the ministry’s Order No. 600 approving the state expert commission’s conclusions on the feasibility study for the comprehensive development of the Piltun-Astokhskoye and Lunskoye licence areas (2nd stage of the Sakhalin-2 project). The ministry’s press services reports that it has decided to annul the conclusions.
The ministry has drafted regulations that will take effect upon agreement with the Russian Federal Service for Environmental, Technological and Nuclear Supervision.
On July 25, 2006, the environmental watchdog Rosprirodnadzor started a comprehensive inspection of the Sakhalin-2 project’s compliance with project documents and requirements of environmental legislation. It completed the inspection on August 25 and filed a suit with the Moscow Presnensky district court, demanding that the aforementioned feasibility study should be annulled.

First Loading Terminal Completed at Sakhalin (24.08.2006)
YUZHNO-SAKHALINSK. The construction of Russia’s first loading terminal for liquefied natural gas (LNG) has been completed off Sakhalin, 805m inside Aniva Bay, on the shore of which an LNG plant is being built in Prigorodnoye. The terminal can service 250m-long tankers with the capacity of 145,000 cu m. Apokesman for Sakhalin Energy, which ordered the construction of the plant, said it takes from 6 to 16 hours to fill a tanker depending on its capacity. The plant, which should be commissioned in late 2007, will produce 9.6 mln metric tons of LNG a year

Pipes delivered for Sakhalin Pipeline (16.08.2006): The delivery of 1,900 km of pipes for the oil and gas pipeline, which is being built under the Sakhalin-2 project, has been completed. The last trainload of pipes has come from the mainland to Russian/French consortium Starstroy, which is building two pipeline legs from northern to southern Sakhalin. A total of 1,600 km will be laid on land and 300 km on the bottom of the Sea of Okhotsk, from oil platforms Molikpak, Lunskaya (Lun-A) and Piltun-B (PA-B). The aggregate weight of the pipes is more than 0.5 mln metric tons. A large batch of the pipes was provided from the Vyksa steel works (located in the Nizhni Novgorod region in the lower reaches of the Oka River), but the multilayer coating was applied to them at a special plant assembled in Nakhodka on the Pacific. The 800-km pipeline is to be completed by the end of 2007.

Rosneft, Sinopec Sink First Exploration Well on Veninskoye Block in Sakhalin (08.08.2006) Russian state-owned oil company Rosneft and China’s Sinopec have started sinking an exploration well on the Veninskoye block under the Sakhalin-3 project. The actual drilling is being done by a subsidiary of the Chinese company. Last year Sinopec received 25.1 % of a joint venture with Rosneft set up to explore the Veninskoye block. Given positive results, this project will become one of the most profitable in terms of implementation deadlines, because a transport infrastructure is located in direct proximity to the field," Rosneft said in a statement.