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The Daily Yomiuri, Japan: Sakhalin oil, natural gas project faces delays, cost hike

Masaya Tomizuka Yomiuri Shimbun Correspondent
Preparations have begun for energy resource development projects on and offshore of Sakhalin Island, Russia, by Royal Dutch/Shell Group, Mitsui & Co. and Mitsubishi Corp., but the project has already been hit by delays and increased costs.
Natural gas reserves in the region are estimated to be equivalent to about six-years worth of Japan's annual consumption.
Despite rising expectations regarding the Russian island's resource potential, the Sakhalin II project faces construction delays and increased costs.
Construction of what will be the world's largest liquefied natural gas plant on a 520 hectare site–equivalent to about 110 Tokyo Domes–has started at a site on the island's coast about an hour from Yuzhno-Sakhalinsk, the capital of Sakhalin.
About 6,000 workers are employed at the site, operating heavy machinery in a temperatures as low as minus 20 C. When finished, the plant will be supplied with natural gas and crude oil via pipelines from offshore natural gas and oil fields about 800 kilometers north of the island.
The development of the Sakhalin II project began in 1994 after an agreement was reached between the consortium and the Russian government. Since 1999, an offshore platform has been used to produce crude oil during summer.
Year-round crude oil production is scheduled to begin in 2007, and production of liquefied natural gas–the core project–will begin in the summer of 2008.
Shipment of natural gas and oil from Sakhalin to Japan involves a one week round trip–far quicker than the round trip to and from the Middle East that takes more than a month.
“Crude oil from Sakhalin is a light oil with a large proportion of gasoline and naphtha. There are excellent facilities in Japan to process liquefied natural gas, which makes energy imports from Sakhalin easy and attractive for us,” said Goichi Komori of the Institute of Energy Economics, Japan.
The natural energy resources in and around Sakhalin are attractive to Japan because it imports 90 percent of its crude oil needs from the Middle East and faces diplomatic difficulties with China over the construction of natural gas fields in the East China Sea.
When Sakhalin II is completed, crude oil production is estimated to top 180,000 barrels per day. Annual production of liquefied natural gas is expected to reach 9.6 million tons.
Oil and natural gas the project produces will account for about 4 percent of Japan's crude oil imports and 18 percent of its natural gas imports.
Half of the plant's output is expected to be channeled to Japan.
However, construction of the plant has been delayed for more than six months due to pipeline rerouting to avoid a breeding ground for rare wildlife. Total investment also is expected to double from the initial plan due to rises in the price of iron.

The consortium has applied for additional loans from the Japan Bank for International Cooperation and other institutions. The Japan Bank for International Cooperation is cautious over the loan, saying it needed to determine the probability of loan repayment and study the project's impact on the environment.

Meanwhile, changes in the consortium's framework may be taking place with Royal Dutch/Shell Group proposing partial sales of its license to a Russian state-run gas company.
The Sakhalin Energy Investment Co., which is the core business unit of the consortium, is considering construction of an additional liquefied natural gas plant in 2013.
(Feb. 16, 2006)

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