Posts on ‘September 24th, 2006’

U.S. Energy Department study concludes crude production will peak, requiring other energy forms

Last September, a Chronicle editorial warned that global oil production would peak in this decade or the next, and then inexorably decline. Given that likelihood, the United States would have to embark on a crash program to develop alternative energy sources or endure crippling increases in the price of energy.

Last week, a study performed for the U.S. Department of Energy concurred with the editorial’s conclusions.

The study, led by Robert Hirsch, warned that the world should be spending $1 trillion per year developing alternative energy sources — including tar sands, oil shale and gas liquefaction — to avoid having its economy crippled by oil shortages and the resulting chaos. The study recommends a 20-year lead time, so it might already be too late to prevent a crunch.

The report said the timing was uncertain. Hirsch predicted peak oil production could come in five years, almost certainly by 2020.

Actually, the world would not have to arrive at peak production in order to experience severe shortfalls in oil supplies. The aftermath of Hurricane Katrina showed what even a minor constriction in supply can do to drive prices skyward. Apart from natural disasters, wars, political unrest, government intervention, deteriorating equipment, accidents or any combination could interrupt the supply of oil.

Demand for gasoline in the United States is dropping with the end of the summer vacation season. Consequently, prices also are dropping. But this trend is extremely temporary.

Demand for oil in China, in India and throughout the developing world will continue to grow. Exxon Mobil CEO Rex Tillerson predicts that world demand for crude will increase 50 percent in a decade.

Bloomburg News reported that the Energy Department study found that conventional oil production reached “soft and sudden” peaks in Texas in 1972, North America in 1985, Great Britain in 1999 and Norway in 2001. These dates were predicted by formulas used by proponents of the peak oil theory to predict the crest of global oil production.

Perhaps the report’s most serious conclusion is that the free market and private industry alone will not prevent economic catastrophe from energy shortages. Government must have a policy for managing the transition from conventional crude oil to other energy forms.

Hirsch, a consultant and former government official overseeing research into solar and other renewable energy forms, said the conversion from oil could be compared to the race for the moon or the mobilization for World War II. Consumers, he said, could not rely on oil companies to get the huge job done.

If oil company managers disagree, they need to demonstrate where all the oil is going to come from to meet rising demand, or propose their own plans for developing alternative sources.

Sunday, September 24, 2006; B06

HUGO CHAVEZ got the attention that he craves by comparing President Bush to Satan last week. But the Venezuelan leader’s absurd talk may be less threatening than his equally absurd incompetence. Since Mr. Chávez took power seven years ago, Venezuela has mismanaged its oil so disastrously that production may have fallen by almost half, according to the estimates of outsiders, reducing global oil supply by a bit more than 1 percent. Along with natural disasters and Nigerian rebels, Mr. Chávez’s ineptitude has contributed to high energy prices.

It takes sustained determination to reduce output by that much, and Mr. Chávez has provided it. He inherited a competent national oil company that produced three times more per worker than its Mexican counterpart. He immediately starved it of investment capital and dispatched ignorant political cronies to oversee it. When this abuse provoked a strike, Mr. Chávez fired the staff en masse, getting rid of two-thirds of the skilled employees and managers.

Mr. Chávez imagines that he can damage the United States by rerouting Venezuelan oil to other markets. He fails to understand that oil is fungible: If Venezuela’s crude is sold to the Chinese, the Chinese will buy less of it elsewhere, freeing up supplies for U.S. consumers. But Mr. Chávez also appears oblivious to the technical difficulties in sending oil halfway round the world rather than selling it in his own hemisphere. Oil tankers do not come cheap, and China will have to build special refineries to process the heavy brand of crude that Venezuela produces. Despite Mr. Chávez’s bluster about tripling exports to China in three years, Venezuela will depend on Yanqui consumers for the foreseeable future.

To the extent that Mr. Chávez’s wild talk stirs up anti-American feeling, he must be regarded as an irritant. If he secures a temporary seat on the U.N. Security Council, as he hopes to do next month, he will doubtless render U.N. diplomacy even more challenging than it is already. Yet it is not the United States but rather Mr. Chávez’s own countrymen who should most fear his intentions. Venezuela’s courts, media organizations and civil society groups have been bullied into submission, and Mr. Chávez is talking about a constitutional change that would allow him to remain in power indefinitely. “The people should not be stripped of their right if they wish to reelect a compatriot whoever it may be three, four, five, six times,” he said recently.

© 2006 The Washington Post Company

Sunday 25 September 2006

Oil, finance and a far flung deal. Did Shell underestimate Russia? asks Tracey Boles

SHELL staked a great deal on the Russian island of Sakhalin, off the frozen coast of Siberia. This former Soviet arms dump and penal colony that lies north of Japan endures Arctic weather for much of the year. Earthquakes frequently shake the island. The Russian author Anton Chekhov called it “hell”.

The conditions may be tough but Sakhalin attracted Shell and other international energy giants, including Exxon and BP, because it is home to oil and gas reserves equal in size to those left in the North Sea.

As global demand for energy increases and supplies of oil and gas diminish, the world’s fuel giants have had to seek new resources in far-flung corners of the earth.

Anglo-Dutch company Shell is the lead partner in the Sakhalin Energy consortium that is developing a $20 billion (£10.5 billion) oil and gas project on the island.

The oil firm hopes the project, Sakhalin II, will top up its dwindling reserves and put it in pole position to take on other programmes in resource-rich Russia. But Sakhalin II has been dogged by both enormous cost overruns and criticism from environmental groups across the world.

Last week the project hit one of its biggest hurdles yet when the Kremlin revoked its environmental licence. The decision, if rubber-stamped, would stall the project as it nears completion and could send costs up further, according to Shell.

It not only jeopardises billions of dollars-worth of bank loans being lined up for the next phase of the project but also puts a question mark over the credibility of Russia as a country with which to do business.

At first Russia, eager for foreign expertise, welcomed the consortium with open arms and in 1994 Shell and its Japanese minority partners Mitsui and Mitsubishi signed the deal to develop Sakhalin.

The agreement gave them the right to 4 billion barrels of the island’s 45 billion oil and gas reserves. Other companies that have rights include America’s Exxon and Russia’s Rosneft.

When complete, Shell’s Sakhalin II development will deliver 150,000 barrels of oil a day and 9.6 million tonnes of liquefied natural gas (LNG) a year, or 7.5 per cent of current global demand for the gas. For Shell, it will generate several billion dollars in revenue.

The development has been a vast undertaking. Two 800 km pipelines are being laid down the island, which involves crossing 1,000 rivers, streams and brooks. The pipelines will carry oil and gas landed from Shell’s offshore fields north of the island to a new liquefied natural gas terminal in the south where ships are not hindered by sea ice.

The $1 billion oil and gas pipelines are scheduled for completion next year and the export facility is due to become operational by the middle of 2008. Japan will be a big customer.

Shell’s chief executive Jeroen van der Veer believes the company’s future lies in such huge exploration programmes, which he calls “elephants”. They are central to Shell’s plan to recover from events in 2004 when it had to admit it exaggerated its “proven” reserves.

But Shell underestimated some of the challenges of working in Sakhalin where temperatures can drop to -40C in winter and reach 30C in summer.

For example, drilling did not go as smoothly as planned. The price of materials such as steel rose. Last year, Shell admitted costs for the project had doubled to an estimated $20billion.

Sakhalin II also became a cause celebre among environmental groups all over the world, largely because it is claimed it infringes on the feeding ground of a number of Western gray whales. There are just 100 of these mammals left, which include 23 breeding females. The project is also located near to salmon spawning grounds.

The environmental disruption caused by laying the pipelines, such as erosion and landslides, has also attracted criticism.

The final straw came last week when the Russian authorities said they would revoke Shell’s environmental licence after allegedly finding its workers had gone into protected forests.

“If Shell had addressed the environmental issues earlier, it would not have given the Russians the ammunition to use against it,” said James Leaton of the environmental charity WWF.

Some believe the Kremlin’s motives are suspect — that it wants to rewrite its agreement with Shell in its own favour.

Other Western firms on the island, such as Exxon, are also coming under scrutiny.

The full impact on Shell may take time to emerge.

Jason Kenney, energy analyst at banking group ING, said he did not expect Sakhalin to feed into cash flows until 2115 but he currently valued the company’s share in the asset at about $7 billion. “This is serious in terms of implications,” Kenney explained. “The environmental challenge of Sakhalin is huge, the technical challenge is phenomenal, and the commercial challenge is very significant. “The contract negotiations are as large a challenge as any.”

Sunday 24 September 2006

THE lawyer of jailed Russian oligarch and former Yukos chief Mikhail Khodorkovsky criticised the London Stock Exchange for failing to warn investors of risks in trading with Russia, writes Jo MacFarlane. Robert Amsterdam, a founding partner of Toronto-based law firm
 
Amsterdam & Perroff, told the Financial Sunday Express the UK exchange was turning a “blind eye” to Russia’s “appalling record” on corporate governance.

The World Bank report, Governance Matters, published this month, ranked Russia 151st out of 200, on a par with Swaziland.
 
“What happened in Sakhalin strengthened the case for those in Russia to use energy as a weapon — which the West will continue to allow,” Amsterdam said. “That is why the World Bank report is so important but the silence that greeted it is staggering.

“The Kremlin has been turning regulatory staff into extortionists. They did it over Yukos, and now over Sakhalin. “The British Government and the rest of Europe allowed Russia to behave in a frankly shocking manner,” he added. “I never accept that Russia has leverage over Europe.”

By Tracey Boles
Sunday 24 September 2006

Banks delay multi-billion dollar loan to oil giant

SHELL bosses have been dealt an unprecedented blow by international lenders who are threatening to freeze up to $5 billion in funding for its flagship Russian project.

The threat is due to a legal wrangle following Russia’s decision last week to pull a
crucial environmental licence for Sakhalin, the mammoth Siberian oil and gas development.

The Anglo-Dutch oil giant was hoping to finance the next phase of its operation on the island of Sakhalin from a consortium of banks, including the European Bank For Reconstruction And Development (EBRD), the Japanese development bank JPIC and the US Import Export Bank.

Last week EBRD decided to postpone a decision on its share of the loan. State-backed JPIC is reviewing its position.

Shell heads the Sakhalin Energy consortium, developer of a controversial $20 billion oil and gas project on the island off the Siberian coast. Japan’s Mitsui and Mitsubishi are minority partners.

“Until there is clarity as to the status of the Russian environmental permit there won’t be a decision either way,” said an EBRD spokesman.

The loan decision had been expected this month or next but the bank is said to be divided on whether a loan of around $500 million should be made at all, with some feeling the project does not meet its strict environmental standards.

JPIC’s London spokesman Kohei Doyoda said: “The issue of environmental permits will affect our decision. EBRD’s decision will also affect what we do. But I don’t know how yet.”

Loss of the licence also led Britain’s Export Credits Guarantee Department to put off a decision on insuring the project with taxpayers’ money.

The Sakhalin project, now $10 billion over budget, drew fire because of claims it impinges on feeding grounds of an endangered whale species and salmon spawning grounds. It also allegedly caused erosion and landslides by laying 800 km of pipeline.

Shell believes it has addressed all environmental issues raised so far and is said to be keen on EBRD involvement to boost the project’s green credentials.

Failure to secure the loans may mean Shell, its partners and the Russian government must stump up the money themselves. The funds are needed for Sakhalin’s development costs until 2014.

Early this week, Russia’s federal agency for environmental, technological and nuclear control (a second environment agency), is expected to back its natural resources ministry in revoking Shell’s licence after inspections revealed workers allegedly went into protected forests on Sakhalin.

Shell declined to comment.

By Robert Collier, Chronicle Staff Writer
Sunday, September 24, 2006 

(09-24) 04:00 PDT El Tigre, Venezuela — On the hot, shrub-covered plains around this dusty, dingy town, an odd courtship is being carried out between the world’s most prominent revolutionary and the world’s biggest oil companies.

Just as there is no love between President Hugo Chavez and the Bush administration, there is little love lost between Chavez and the foreign oilmen who are pumping up the huge reservoirs of underground oil. But they need each other. The United States needs Venezuela to help quench its bottomless thirst for oil, and Chavez needs America to buy it from him in order to fund his dreams of spreading his leftist ideology around the hemisphere.

The stakes here are huge. The area around El Tigre, known as the Orinoco Oil Belt, possesses the world’s biggest petroleum reserves — 1.3 trillion barrels of so-called extra-heavy oil. Chevron, Exxon Mobil, ConocoPhillips and dozens of other foreign firms are here, using recently developed technologies to extract the tarlike, sulfurous crude and refine it.

“Everyone agrees that the Orinoco Belt has the biggest reserves in the world,” said Alberto Quiros, a Chavez critic and former president of Royal Dutch Shell’s Venezuela operations. “What Chavez will do with them is another question, but there’s no doubt that Venezuela will take Saudi Arabia’s place as No. 1.”

Chavez already is forcing Chevron, which is based in San Ramon, and other oil companies to swallow some bitter pills.

In the past two years, he has raised foreign oil companies’ corporate income tax to 50 percent from 30 percent and increased royalties payable to the government from as low as 1 percent to 33 percent. After he threatened to confiscate their operations elsewhere in Venezuela, 26 foreign oil companies, including Chevron, agreed earlier this year to convert their operations into joint ventures with the state-owned Petroleos de Venezuela (known as Pdvsa), with the government holding the majority share. Two European firms — Total of France and ENI of Italy — refused, and Chavez promptly expelled them.

Now, the government is demanding similar concessions at the four Orinoco Belt operations, in which Chevron, Exxon Mobil and others have invested about $17 billion. The government is demanding that Pdvsa’s ownership share of the projects be increased from an average of 40 percent to at least 51 percent and that Pdvsa take over operational control of the oilfields.

Negotiations over these demands are coming to a head, and the outcome may influence whether Venezuela’s rising tensions with Washington subside or even escalate. Analysts say foreign companies may seek international arbitration to block Chavez’s takeover attempt.

“It will be quite a fight,” said Gersan Zurita, an oil-industry analyst with credit evaluator Fitch Ratings in New York, which advises investors who have purchased $3.9 billion in bonds for the Orinoco Belt projects. In June, Fitch Ratings downgraded the projects’ credit scores, saying Chavez’s demands could damage the projects’ viability.

But for Chavez, it’s a matter of national pride — and political bragging points. Around the country, the government has put up posters and billboards showing Chavez extending his arms in a victory salute, accompanied by the slogan, “Full oil sovereignty: Joint ventures — more benefits for the people!”

As top-secret negotiations begin, all sides in the conflict have tried to keep a low profile. Chevron, Exxon and ConocoPhillips declined Chronicle requests to interview their officials and to visit their installations in Venezuela.

Zurita said the companies fear being blacklisted by Chavez and losing out on future oil deals.

“It’s a very delicate situation. It involves more than just these contracts. Any comment by any of these companies could be used by the government to demand more concessions,” Zurita said. “The biggest incentive (for the companies) is to preserve access for the future. These are enormous reserves.”

Luis Giusti, president of Pdvsa from 1994 to 1999, noted that many companies have little choice but to look to Venezuela because their reserves elsewhere are dwindling and their access to the Middle East is limited by the firm grip of those nations’ government monopolies.

“The foreign companies will accept his conditions because they have so much capital sunk there, and they can’t afford a confrontation with the government,” said Giusti, who during his time at Pdvsa championed many of the privatization policies that Chavez is now reversing.

For its part, the government seems to have adopted a bunker mentality. Pdvsa’s Caracas headquarters declined a Chronicle request to interview its officials or to visit its facilities. One official said that all visits were suspended “for security reasons” after a July 17 fire damaged the country’s largest oil refinery, at Amuay in the northwest — a sign that the government is nervous about the company’s high rate of accidents, which it blames partially on sabotage by U.S.-inspired domestic opposition groups.

The only government official willing to talk about the subject was Fadi Kabboul, the oil attache at Venezuela’s embassy in Washington.

“For the market, the Orinoco extra-heavy oil operations are very profitable, and they will continue being very profitable. There will be ever-greater interest and participation by foreign companies,” Kabboul said.

The Orinoco conflict carries echoes of the knock-down, drag-out battle for control that erupted in December 2002, after Chavez ordered Pdvsa to directly fund and operate major social-welfare projects in poor communities. The company’s executives, engineers, technicians and ship captains accused Chavez of “politicizing” Pdvsa, went on strike and shut down almost all operations for three months.

The strikers had hoped to topple Chavez by reviving a military-civilian coup effort that overthrew Chavez for two days in April 2002. But Chavez defeated the strike and fired 18,000 of the strikers — about 90 percent of Pdvsa’s white-collar workforce. The company is still struggling to recover, and most energy analysts believe that Pdvsa’s production is only one-half of its pre-strike level. Nevertheless, Chavez’s oil revenue has been buoyed by the increase of production by foreign companies, which has risen from 400,000 barrels per day to 620,000 per day, and the more-than-doubling of international oil prices.

In El Tigre, dozens of fired Pdvsa employees gather every day at 3 p.m. in a neighborhood park to exchange job tips and speculate hopefully about Chavez’s downfall.

“This could be the issue that finally forces the Bush administration to take a stronger stand against Chavez,” said Antonio Cardona, a former director of Pdvsa’s crude pumping operations for the region. “Foreign companies have been afraid of Chavez, and they’re staying just so they don’t lose all they have invested, but he may have finally overplayed his hand now.”

Cardona said he worked for Pdvsa for 20 years until he joined the strike. Three and a half years later, like his fellow strikers, Cardona is blacklisted throughout the oil industry by Pdvsa, which prohibits even private companies from hiring any ex-striker. Cardona must scrabble for work, doing small engineering jobs for private-sector construction projects.

At the same time, Chavez has begun shifting oil exports away from the United States, where Venezuelan crude is the fifth-largest foreign source of petroleum. During the first half of 2006, Venezuelan oil exports to the United States dropped by approximately 6 percent from the year before to about 1.3 million barrels per day, according to U.S. Energy Department figures.

At the same time, Chavez has struck oil deals with Beijing, including $5 billion of Chinese investments in Venezuelan energy projects by 2012. Venezuela’s exports to China, while still relatively small at 150,000 barrels per day, are projected to reach 500,000 barrels by 2010.

Chevron may wind up playing an unwilling role in Chavez’s most audacious plan — construction of a 5,700-mile natural-gas pipeline through South America. The proposed $25 billion project, the central element of Chavez’s plan to unify the continent’s economies, would start in the eastern Venezuelan city of Puerto Ordaz, slice through Brazil’s Amazon jungle and end in Argentina, with trunk lines to Peru, Bolivia and Chile.

Chevron is already a major player in helping Venezuela exploit its offshore natural gas deposits in the Caribbean and Atlantic, which at 151 trillion square feet are the eighth-largest proven reserves in the world. Recently, Venezuelan officials have suggested that despite prior understandings that Chevron would be allowed to convert the production from its Deltana field in the Atlantic into liquefied natural gas and export it to the United States, this supply will instead be sent south via the new pipeline — whether Chevron likes it or not.

Some experts scoff at Chavez’s pipeline idea. “It’s a very large and very costly project,” said Giusti. “It will never be built to transport reserves of gas that don’t exist to markets that don’t exist.”

Other analysts call it far-thinking. A recent study by the Latin American Energy Organization, a regional alliance headquartered in Quito, Ecuador, concluded that Chavez’s pipelines could save the area’s governments $100 billion over the next 20 years by lowering imports of liquid natural gas from Asia and Africa.

One smaller project is already under construction — a 140-mile gas pipeline linking Venezuela to Colombia, with an extension planned to Panama.

In El Tigre, a sprawling small city of 150,000 in Anzoategui state, there is little evidence of the nearby oil bonanza. Main streets are nondescript, and the highways leading out into the surrounding savanna are narrow and potholed.

But billboards are everywhere touting Chavez and the state’s governor, Tarek William Saab.

“With Tarek and Chavez, Anzoategui is progressing!” blare the signs, showing a triumphant Chavez leading a slightly sheepish governor, both wearing revolutionary-red shirts and surrounded by cheering crowds.

But even many Chavez supporters complain that the president’s grand ambitions have not benefited the people of Anzoategui.

“Because of oil we have everything, yet we have nothing,” said El Tigre Mayor Ernesto Paraqueima, a member of Chavez’s ruling coalition.

Speaking in his simple office in El Tigre’s concrete-block municipal building as a broken sprinkler downstairs coated the windows with water, he bitterly criticized what he said was the waste of huge sums of money.

“The bureaucracy is enormous, and corruption is gigantic,” Paraqueima said. “Anzoategui is a rich state, with rich land. You can look on either side of any highway in Anzoategui, and you won’t see anything being cultivated anywhere. That’s because of oil. We prefer to bring rice and potatoes from Colombia than growing it here. We produce almost nothing but oil.

“Every foreign oil company in the world is here, but where is the benefit?”

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Chavez’s oil money

In the past three years, as international oil prices have soared, Chavez has eliminated his political opposition’s influence over government finances and drawn a tight curtain of secrecy around them.

In 2003, after the opposition led a chaotic strike by executives and technicians at the state-owned, yet formerly autonomous, oil company Petroleos de Venezuela, or Pdvsa, Chavez fired 18,000 of the white-collar strikers. In 2005, Chavez gained full control of the formerly independent Central Bank, and opposition parties’ boycott of legislative elections gave his coalition all 167 seats in Congress that December.

Even Citgo, the U.S. refiner and gas retailer wholly owned by Pdvsa, earlier this year paid off all its debt and stopped the routine practice of reporting data to Moody’s financial service — thus ending all outside scrutiny of the company’s books.

What’s more, much of Venezuela’s oil revenue now stays outside the government’s budgetary channels. In recent years, Congress has set each year’s government budget by setting Pdvsa’s tax payments artificially low. This year, for example, Pdvsa’s taxes are pegged to a price of $26 per barrel for Venezuela’s blend of heavy crudes — which currently sells for $58. The $32 per barrel difference remains largely off-budget, with no legislative supervision or disclosure of line-item details.

Documents released by the government earlier this month showed oil revenues of $49 billion for Pdvsa in the first six months of 2006, a 21 percent increase from the same period last year.

In Caracas, Pdvsa declined to make officials available to The Chronicle for an interview.

– Robert Collier

E-mail Robert Collier at rcollier@sfchronicle.com.

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©2006 San Francisco Chronicle

(URSULA HYZY / AFP-GETTY IMAGES
DEEP FREEZE: Foreign oil firms fear they may lose their investments in the Russian Far)

Drilling for oil and gas around the harsh, remote island of Sakhalin in Russia’s Far East was never going to be easy, but a political chill has put some of the world’s biggest energy projects in an unexpected deep freeze. In the decade since they negotiated separate drilling agreements with Russian authorities, ExxonMobil and Royal Dutch Shell have gone way over budget and incurred the wrath of leading environmental groups.

But last week, the two oil majors faced their biggest challenge so far: a Kremlin backlash that could hold up or even potentially derail their plans. Moscow revoked a key environmental license for Shell’s $20 billion project, and took a tough line with Exxon over likely cost overruns on its $13 billion efforts. Russian officials also took aim at a third big oil exploration site in the Arctic by France’s Total, saying it wasn’t performing as promised.

Widely interpreted as the latest attempt by the Kremlin to gain control of its massive hydrocarbon resources, the triple whammy sent shivers through the Western oil industry. Russian officials have long grumbled about production-sharing agreements it signed with the three Western firms in the 1990s, when oil prices were one-sixth their current level and Moscow was strapped for cash.

“This is what happens when Russian oil companies have their headquarters at the Kremlin,” says Robert Amsterdam, the lawyer for Mikhail Khodorkovsky, the jailed former head of Russian oil company Yukos, which authorities seized and broke up in late 2004.

Remarks by a top official at Gazprom, the national energy monolith, just two days after Shell’s setback, fueled speculation that it was trying to get a big piece of the Sakhalin projects; in a speech, deputy director Aleksandr Ananenkov laid out a broad vision for that company to link oil fields in eastern Siberia with the Sakhalin project to create one vast network. The affected oil firms have reacted guardedly, but others have been blunt in their criticism — most notably Shinzo Abe, Japan’s next Prime Minister.

The Sakhalin projects are supposed to become a major source of liquefied natural gas for Japan, and two Japanese companies are Shell’s partners. “I am concerned that major delays might have a negative influence on overall Japanese-Russian relations,” Abe warned. The political and business forcast for Sakhalin: already cold, with increasing iciness likely.

MOSCOW, Sept 24 (Reuters) – Russian gas monopoly Gazprom (GAZP.MM: Quote, Profile, Research) is in talks to buy a 20 percent stake in a Sakhalin Island project led by Exxon Mobil (XOM.N: Quote, Profile, Research), Britain’s Observer newspaper reported on Sunday.

The paper, which gave no source for the information, said Gazprom had confirmed it was in talks to buy the stake from India’s Oil and Natural Gas Corp. Ltd (ONGC) (ONGC.BO: Quote, Profile, Research), though a Gazprom source who requested anonymity told Reuters he believed the report to be incorrect.

Gazprom, the world’s largest gas company, has been seeking a foothold on the energy-rich island off Russia’s Pacific coast via a swap deal with Royal Dutch Shell (RDSa.L: Quote, Profile, Research), which has 55 percent of the neighbouring Sakhalin-2 project.

However, talks on the swap have stalled since Shell unveiled a doubling of its project’s budget from $10 billion to $20 billion last year.

As well as angering Gazprom, the move has prompted Russia’s Natural Resources Ministry to open an environmental investigation into Sakhalin-2, culminating in its decision to withdraw a key ecological permit last week.

The ministry has also brought pressure on Exxon’s venture, which it says plans a similar budget overrun from $12.8 billion to $17 billion.

The ministry says it will not tolerate budget increases because they contravene the terms of the production sharing agreements (PSAs) which govern the two projects.

Under the PSAs, the oil firms can recoup project costs before sharing any profits with the Kremlin, so bigger budgets mean less money later for the Russian state.

The tough line on the two projects has drawn expressions of concern from British, Dutch, European Union, Japanese and U.S. politicians, as well as the companies themselves.

Besides Exxon’s 30 percent holding and ONGC’s 20 percent, the shareholders in Sakhalin-1 also include a Japanese consortium with a 30 percent stake and Russian state oil firm Rosneft (ROSN.MM: Quote, Profile, Research), which holds 20 percent.

Rosneft has interests in most projects on Sakhalin Island and a history of rivalry with Gazprom, even though both are controlled by the Kremlin. Sakhalin-1 has already begun producing oil and Exxon says it plans to load its first export cargo by the end of September.

It is due to pump 250,000 barrels per day (bpd) of crude by the end of this year, making it one of this year’s five-biggest oil projects worldwide and a welcome source of gasoline- and distillate-rich crude for Asian importers.

Gazprom, which wants to boost the oil side of its business, has monopoly power over all gas projects in Russia except for the PSAs. It is not yet involved in any projects on Sakhalin, meaning it is absent from one of Russia’s main energy hubs.

A Gazprom spokesman declined to comment on Sunday.

© Reuters 2006. All Rights Reserved.

24/09/2006

Dubai, Asharq Al-Awsat- Shell announced initiatives it has adopted for mitigating climate change and promoting learning and education in the region, at the third Middle East Corporate Social Responsibility Summit.

Dr. Gavin Graham, VP New Business, Middle East, Caspian & South Asia, Shell EP International Ltd said, “Shell has incorporated two key activities in its business strategies towards fulfilling the objectives of its Corporate Social Responsibility (CSR) policy. The first of these addresses climate change through the capture and utilisation of carbon dioxide while the second involves extending continued support to education, learning and development initiatives, in partnership with the Emirates Foundation, local universities and communities.”

Citing climate change as a key area of focus of Shell’s CSR programme, Graham added, “Shell is deploying its capabilities and technologies in partnership with emerging players in the region, such as Mitsubishi Heavy Industries, Mubadala and Al Masdar to investigate harnessing of carbon dioxide to mitigate the effect of greenhouse gas emissions on climate change.”

“Shell is working to achieve Enhanced Oil Recovery (EOR) through a process whereby CO2 from industrial sources is captured, compressed and then injected into depleted oil fields. This process could increase the ultimate recovery of oil by more than 10 per cent, thus enhancing the potential for additional oil recovery and yielding fuel that could be equivalent to several years of current global oil demand,” Graham added.

By Rick Wilkinson
September 23, 2006 12:00am

THERE’S a growing sense of excitement in Darwin as the petroleum industry moves into a new wave of exploration and appraisal of gas prospects in the Timor Sea.

Australia’s most northern city may soon rival the north-west of Western Australia as an important hub in the supply of gas for export and domestic use.

The main push is being driven by the upward spiral in global demand for liquefied natural gas (LNG). But more recently, the possibility has arisen of a window of opportunity in Australia’s domestic market – particularly in the south-eastern states – as doubts continue to surround the PNG-Queensland gas pipeline project.

ConocoPhillips Australia is the biggest LNG player in the Timor Sea, and it is keen to expand its existing 3.5 million tonnes per year liquefaction facility at Wickham Point by adding a second and perhaps a third train.

Other players with significant holdings in the region include Santos, the Japanese companies Inpex and Osaka Gas, Woodside, Shell, ENI of Italy and the Australian junior Methanol Australia.

But surprisingly the companies that hold the most Timor Sea acreage are a group of seven “dark horses” belonging to the stable of Melbourne-based entrepreneur Geoff Albers. Between them, these companies – Auralandia, Natural Gas Corp, Australian Oil & Gas Corp, National Oil & Gas, Australian Natural Gas and Nations Natural Gas – hold 100 per cent of eight permits.

Five of these lie in the eastern Timor Sea and occupy strategic positions in and around the acreage and existing gas discoveries held by all the major operators north and north-east of Darwin. The Albers Group intends to run preliminary surveys over the areas.The common goal for each player in the eastern Timor Sea is to prove up sufficient accessible gas reserves to support development projects that could come on stream in a 2012-2015 timeframe.

Frontrunners ConocoPhillips and Santos have geared their joint exploration/appraisal program to the mooted expansion at Wickham Point. Currently the LNG plant is being fed from the Bayu-Undan gas field in the joint petroleum development area between Australia and East Timor.

However, reserves in that field are not sufficient to supply a second train and the two companies have embarked on an initial two-well drilling program across two permits 400km north-east of Darwin. The first, now drilling in NT/P69, is a well called Barossa-1.

Despite the name it is an appraisal of a gas discovery called Lynedock originally made by Shell in 1973, but eventually relinquished by that company in 1998 in the belief that the reservoir was too “tight” to sustain commercial production. New leaseholders ConocoPhillips and Santos (with 60 per cent and 40 per cent, respectively) are hoping to find more permeable reservoir in the structure.

Barossa-1 will be followed by an appraisal of the partnership’s 2005 Caldita gas discovery in adjoining permit NT/P61. No reserves have been publicly announced for either field, but Caldita-1 flowed at 33 million cubic feet of gas a day on test, which suggests a significant hydrocarbon column.

Santos (in partnership with Shell and Osaka Gas) also drilled a well called Evans Shoal South-1 in NT/P48 during the middle of this year which found gas in primary and secondary objectives. However, mechanical problems prevented testing and the group is still evaluating the downhole logs.

A 1988 BHP Petroleum discovery at Evans Shoal about 17km to the north in the same permit is estimated to contain 6.6 trillion cubic feet of gas. Unfortunately, the find has up to 27 per cent carbon dioxide content and, to a greater or lesser extent, this appears to be a common bugbear in all the east Timor Sea discoveries so far.

The gas liquefaction process will not tolerate carbon dioxide, which means its removal is an added cost in any field development equation.

Subject to results at Barossa and Caldita, Santos and ConocoPhillips are believed to be considering a pipeline connecting both these fields (and possibly Evans Shoal/Evans Shoal South as well) with the Bayu-Undan field facilities in the central Timor Sea. Carbon dioxide could be scrubbed out at this point and injected into the depleting Bayu-Undan reservoir while clean gas is sent down the existing pipeline to Wickham Point.

One Timor Sea explorer for whom carbon dioxide is less of a problem is Methanol Australia. This company has won environmental approvals for a proposed development which involves the production of LNG and methanol in two separate but adjacent plants to be built on offshore platforms in the relatively shallow water (70 metres) of Tassie Shoals about 350km north-east of Darwin.

Carbon dioxide in amounts up to 25 per cent is an acceptable ingredient in the gas supply for the production of methanol, and preliminary talks have been held with other explorers to take gas from the carbon dioxide-prone fields nearby.

Methanol Australia is also keen to find low-CO2 gas for its parallel LNG project. The company is pinning its initial hopes on two prospects (Epenarra and Blackwood) which lie immediately west of Tassie Shoals in its 100 per cent-owned permit NT/P68.

Epenarra-1, to be drilled next year, is a follow-up to a nearby gas find called Heron made by Arco back in 1972. Blackwood, also to be drilled next year, is a promising exploration target a little to the north.

Potential supply sources for the Methanol Australia and ConocoPhillips/Santos development proposals lie solely within Australian waters. Two other possible east Timor Sea gas projects will rely on international negotiations. The first involves Japanese company Inpex, which has 100 per cent of a discovery called Abadi that lies in Indonesian waters just north of the sea boundary with Australia and not far north of the Barossa/Lynedock field.

Early estimates suggest a gas reserve of around 5 trillion cubic feet. This figure is being clarified with a three-well drilling program now under way. Although in Indonesian waters, Abadi is very remote from that country’s gas infrastructure and Inpex sees another option in attaching the field to the end of the possible Barossa-Caldita pipeline to Darwin and Wickham Point. The idea has added attraction because Inpex is already a stakeholder in the LNG plant through its 12 per cent share of Bayu-Undan.

However, this scenario depends on agreement and arrangements with the Indonesian Government.

The other political “football” is the Woodside group’s (Woodside, ConocoPhillips, Shell and Osaka Gas) Greater Sunrise gas discoveries that straddle the Australia/JPDA boundary with East Timor.

Woodside has consistently said that the development is stalled until legal, regulatory and fiscal certainty can be guaranteed — looking unlikely in the near future given the unrest in East Timor.

Some $250 million has already been spent on feasibility and commercial studies for Greater Sunrise, so there would be no need to begin again if those guarantees were given. Nevertheless, there is still some divergence within the field consortium itself.

Not surprisingly, ConocoPhillips is keen to see a pipeline to hook into the Bayu-Undan route to Wickham Point. Shell is more in favour of a separate line to a new onshore LNG plant – the most likely site being Glyde Point about 40km north-east of Darwin.

Up till now the main focus of all these development proposals has been export LNG. Recent doubts cast over the PNG-Australia gas pipeline project may also open up the Timor Sea to Australia’s domestic market.

ENI’s Blacktip field in the Bonaparte Gulf (with 1 trillion cubic feet of reserves) is already slated for supply to markets in the Northern Territory.

But an early candidate for larger volumes from the Timor Sea might be Alcan at the Gove alumina complex, which has currently organised to take PNG gas. In time, there could also be market opportunities in the country’s south-east.

Non-arrival of gas from PNG in 2009/2010 would leave a shortfall of 40-50 petajoules a year of supply to the Australian market. Some of this will probably be taken up by the rising tide of coal bed methane projects and new gas conventional developments in the Gippsland, Otway and Cooper basins.

But in the longer term, the old idea of reversing flow in the Amadeus-Darwin pipeline and connecting it to the south-east grid by closing the Amadeus-Moomba gap may be revisited.

In any event, Timor Sea gas seems likely to be a key component of Australia’s gas equation in the years to come.