Houston Chronicle: At long last, Sakhalin-2 project nears finish line

A resident fishes near natural gas storage facilities on Sakhalin Island. Environmentalists say alleged violations in the area are more than just an excuse for Moscow to grab oil.
Burt Herman: ASSOCIATED PRESS

Nov. 19, 2007, 7:56PM
By BURT HERMAN
Associated Press

YUZHNO-SAKHALINSK, RUSSIA — Braving a new frontier of oil exploration around Russia’s remote Sakhalin Island means conquering ice-locked seas, frequent earthquakes and muddy swamps fed by melting snow in the rapid springtime thaw.

Executives at the world’s largest oil and natural gas project, known as Sakhalin-2, say they are nearing the finish line as they aim to open up a vast new energy source for the nearby Asian economic powerhouses of Japan and South Korea along with the U.S. and others.

The waters of the Sea of Okhotsk around Sakhalin Island are believed to hold total estimated reserves of at least 45 billion barrels of oil and natural gas equivalents, an amount similar to the resources remaining in the Gulf of Mexico or the North Sea.

One of most formidable challenges to unlocking those riches proved to be the Moscow government itself. It won a tug of war with foreign investors that left Russia’s state-controlled Gazprom gas giant in control and reduced the Netherlands’ Royal Dutch Shell and Japanese partners to minority shareholders in Sakhalin Energy, the international consortium running the project.

Moscow threatened last year to pull the project’s operating license, citing problems in compliance with environmental regulations. The risk of losing the entire project pressured Shell and other founders to cede majority control to Gazprom in April for $7.45 billion.

Shell now holds 27.5 percent of Sakhalin Energy, along with Japanese firms Mitsui & Co. at 12.5 percent and Mitsubishi Corp. at 10 percent.

After the switch in control, the Moscow government last month gave its tentative approval for the project and said environmental compliance had improved.

“At the present time, we are speaking the same language, and the company is focused not only on receiving commercial returns from the project but on following the Russian laws and the protection of our natural environment,” Natural Resources Minister Yuri Trutnev said last month in a meeting with executives at Sakhalin Energy.

Sakhalin Energy has already been exporting limited oil from a single offshore platform since 2003 that can only operate half of the year, when seas aren’t frozen. But the next phase of the project, set to be completed by the end of 2008, will see the opening of two more offshore platforms along with pipelines bringing oil and gas to the island’s warmer southern shore.

To export the gas, the company is building Russia’s first-ever liquefied natural gas plant, which converts the gas to a liquid by cooling it to a temperature of minus 258 Fahrenheit so that it can be transported by ship. Customers in Japan, South Korea and the U.S. have already bought all the gas to be produced here for more than the next 20 years.

http://www.chron.com/disp/story.mpl/business/5315263.html

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