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Alaska Journal of Commerce: Despite hurdles, Shell says Sakhalin project is on target

 Ian Craig, CEO, Sakhalin Energy

(Shell Oil’s Ian Craig discusses the future of the Sakhalin 2 project at a late September conference in Yuzhno in Russia’s Far East. PHOTO/Rob Stapleton/AJOC)  

For publication Sunday 15 October 2006  

By Tim Bradner 
 
YUZHNO, Russia – Sakhalin Energy Investment Co., the Shell-led consortium developing the $20 billion Sakhalin 2 liquefied natural gas project, is facing political issues with the Russian federal government, but managers on the project say these will be resolved and the massive project will be completed on schedule, in 2008.

Sakhalin 2 is now 80 percent complete, and its building is still on track overall, despite a temporary shutdown of pipeline construction in one area due to erosion problems, SEIC president Ian Craig told the annual Sakhalin Oil and Gas conference Sept. 27.

“We are now in the second year of peak activity with almost 70 million manhours per year being expended and 17,000 people now employed on Sakhalin, 70 percent of them Russian nationals,” Craig said.

The Sakhalin conference is held annually, usually in London. This year, on the 10th anniversary of the projects, it was held for the first time in Sakhalin in Russia’s Far East.

Craig said much of the pipeline work has been completed. About 870 miles of onshore pipelines, two pipelines built side by side to carry both oil and gas, have now been welded, Craig said. The pipelines run almost the entire length of the island, from the north, where the oil and gas fields are, to the LNG plant and oil export terminal sites at the port of Korsakov, in the island’s south.      
 
The issues being raised by the Russian government revolve partly around environmental problems experienced with construction of the pipeline and partly around Shell’s revised estimate of the project costs, which has increased from $12.5 billion to $20 billion.

Russia’s Ministry of Natural Resources said it revoked a key environmental permit for the pipeline, although Craig said Sept. 27 that SEIC has yet to be formally notified of any action. The federal government said it has also launched an investigation of a Russian subcontractor to SEIC that may have broken environmental laws on the pipeline construction.

While the environmental issues are there, many industry observers also believe the government’s pressure on the consortium is intended to allow Gazprom, a state-owned Russian gas company, to gain more favorable terms in negotiations to buy an ownership interest in the project.

Gazprom and Shell announced an agreement last spring to exchange assets in a move that would have Shell obtain part ownership of a Gazprom property in central Russia and Gazprom to own part of Sakhalin 2. The negotiations went on hold after SEIC announced the cost increases.

Other milestones for the project include installation of a 23,000-ton topside structure on the new Lunakoye-A offshore gas production platform, one of two gas production platforms that will supply gas to the Sakhalin 2 project.

“The platform is currently undergoing hookup and commissioning. A major milestone was reached in mid-September when the platform was certified for habitation, a critical step in preparing for drilling the development wells in January,” Craig said told the conference.

Next year, a topside will be installed on the Piltun platform, a second offshore gas production platform now under construction, he said.

Meanwhile, two new modules were also installed this summer on the Moliqpak oil production platform, which now produces oil on a seasonal basis. The modules will allow the platform to produce year-round once the Sakhalin 2 oil pipeline is finished. Moliqpak was brought to Sakhalin from the Alaskan Beaufort Sea and modified to be used for production. The consortium is also working to complete onshore oil and gas processing plants.

In a related development, the bulk of the LNG that will be produced by Sakhalin 2 in its initial phase has been committed in sales contracts, Ate Visser, commercial manager for Sakhalin Energy, told the conference Sept. 28.

SEIC has now committed 98 percent of LNG production from Trains 1 and 2 of the LNG plant now under construction. A LNG plant unit is referred to as a train. A final contract has not yet been formally approved, and the purchaser will not be identified until it is, he said.

Visser told the conference that the company signed contracts for 1.4 million tons of LNG during the last year. The final 2 percent of production capacity from Trains 1 and 2 will be held in reserve so that the plant has flexibility, he said

With virtually all of the LNG from Trains 1 and 2 now committed, SEIC has started pre-feasibility studies on a third LNG train. “We believe we can develop a third train, and we have the resource base to support it,” Visser told the conference. Eventually a fourth LNG train might also he built, he said.

Sakhalin 2 is the only major Russian oil and gas project without at least partial ownership by Russian companies. Sakhalin 1, the Exxon Mobil-led project, has 20 percent of its ownership held by Rosneft, a major Russian company. Rosneft is also 51 percent owner in a joint venture with BP to explore in the Sakhalin 4 and 5 areas north of Sakhalin.

In a Sept. 27 press conference in Yuzhno, Craig said the problems will be resolved without a disruption to the project schedule. Shutting down a project of the scale of Sakhalin 2 would be unthinkable, Craig said. A one-year delay would add $5 billion to the project cost, combining lost revenues and the cost of stopping and then restarting construction, he said.

Tim Bradner can be reached at [email protected].

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