Sakhalin island looks to boost its visibility
By PATRICK GILL / The Russia Journal
Far East representatives hope Moscow
exhibition will attract
investment.
Representatives of the Far East Russian island of
Sakhalin
hope an exhibition this week in Moscow will boost the region’s
visibility
and help attract business and investment. At "Sakhalin in the 21st
Century,"
March 28-30 at the Federation Council in Moscow, business and
government
leaders will discuss economic developments, legal changes and improving
Sakhalin’s relations with other regions. Representatives from oil, coal
mining, science, transport, fishing, light industry and financial
structuring
companies – 22 in all – some making the long trip from Sakhalin to
Moscow,
will promote their goods and services.
"Sakhalin is second only to Moscow for foreign
investment
in Russia and is number one in the Far East," said Michael Allen of the
American Business Center in Yuzhno-Sakhalinsk, the island’s main
city.
"It saw a jump from $140 million in 1998 to $1 billion last year. In
2000,
we expect this figure to drop to around $500 million – a hiccup that is
largely due to ExxonMobil’s drilling program having been held up by
difficulties
in obtaining a license." Allen said that the "main oil and gas projects
are currently Sakhalin 1 and Sakhalin 2, product-sharing agreements
started
in 1996 that began extracting oil from the Sakhalin shelf last year. In
addition, there are two or three more product-sharing agreements
waiting
in the wings."
Offshore July 2003 wwwoffshore-mag.com
Sakhalin II will without a doubt be the largest
of its
kind for some time to come. Now that the final investment
decision
on this $10 billion project has been made, Shell is already working
hard
with the Russians to optimize participation. 'Me project will be
operated by Sakhalin Energy
The giant Sakhalin Phase II project will test
the skills
of shell’s EP Projects team.
Investment Co., of which Shell holds 55% along
with partners
Mitsui, 25%, and Mitsubishi, 20%. This massive project includes oil and
gas development as well as an LNG facility. One of the project
requirements
is that it includes 70% Russian content. A Russian group has been
established
to devise a candidate list of contractors with the necessary
qualifications
and background to work on the project. In addition to the
in-house
capabilities of such companies, joint ventures will be considered with
international companies. This will ensure that the best available
technology is used on the project and will facilitate a transfer of
technology
to Russian firms for future application.
According to Greer, there is already a
considerable amount
of civil engineering expertise available in Russia, and this makes a
good
starting point for the skills needed on Sakhalin. This project
will
have a life of 30-40 years, so it is critical to promote the
development
of skills required for this project within the domestic Russian labor
force.
While Sakhalin 11 will be a major undertaking, Greer said, none of the
technology itself is new to Shell.
Part of how the EP Projects group evaluates
its role in
such undertakings is to consider what the local operating unit of Shell
has to offer. The global EP Projects staff then enhances these
capabilities.
Shell has broad experience in LNG projects for example. The
company
also has extensive surface and subsurface expertise. Still, the
operating
unit will certainly need additional manpower and may require technology
that it is not familiar with. These are areas where EP Projects
will
help.
Another example of how EP Projects interacts
with the
rest of Shell is the group's involvement on the Bonga FPSO offshore
Nigeria.
This FPSO was a huge technical step change for Shell's Nigeria
operation.
Greer said the company had to assess its capabilities in that
country.
The decision was made that the technical expertise was held by Shell in
Houston. So it was necessary to transfer this knowledge to the
Nigerians
who would be operating the facility.
While the industry continues to lament the
small number
of new engineers who choose a career in E&P programs like EP
Projects
ensure that the new recruits who do come in will have the support they
need to succeed and a variety of fascinating challenges to help them
develop.
EP Projects' future is filled with opportunities.
This year, foreign investors are expected to
inject $350
million into the oil-shelf projects off Sakhalin, with each dollar of
direct
investment in shelf projects yielding two dollars for the local
economy,
officials said. Sakhalin is the fourth largest in industrial
manufacturing
out of the nine Far East regions, a figure the exhibition hopes to
improve
this year. The local mining industry has already undergone improvements
– 20 worked-out mines have recently been replaced, a step which local
authorities
hope will lead to cheaper coal supplies and lower overheads for
industry.
One problem facing the local economy is the
dwindling
deposits of onshore oil and gas fields. These are substantially
depleted,
and oil extraction has been declining continuously since 1984.
The
good news for the area is that new fields have recently been discovered
off the northeast shore of the island. The island has substantial
resources
of oil, gas, coal and gold, with oil and gas the main areas of foreign
investment – constituting 15 percent of Sakhalin’s total commodity
output.
The island, with a population of 670,000, is
seven hours
ahead of Moscow time and situated in the Okhotsk Sea north of Japan.
Russia
and Japan have been in conflict since the early 19th century over the
volcanic
Kuril islands, which neighbor Sakhalin. Russia won back the islands
along
with southern Sakhalin after World War II, although the dispute
continues
as Japan still lays claim to the islands. Earthquakes continuously
threaten
Sakhalin and the Kurils, the most destructive in recent times being the
1995 quake, which destroyed the Sakhalin town of Neftegorsk.
Next month, a new, major project involving
supplying
electricity from Sakhalin to Hokkaido, Japan, is set for approval. The
$12 billion plan was first discussed between Anatoly Chubais and the
governor
of Sakhalin two years ago, and should become a reality after
feasibility
studies are completed in April, officials said.
(Information on the exhibition can be obtained
by calling
the Sakhalin representative in Moscow at 203-5141.)
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BISNIS Russian Far East/Oil and Gas Update,
21 July 2003
KHABAROVSK KRAI COMPANIES & SAKHALIN OIL AND
GAS
PROJECTS
AUTHOR: ANDREI VASENYOV, BISNIS REPRESENTATIVE
IN KHABAROVSK,
RFE
SUMMARY
The Sakhalin oil and gas projects, which have
grown into
one of the largest direct investments in the Russian economy, involve
the
participation of a large number of Russian and foreign suppliers,
manufacturers,
construction and design companies and accompanying service providers.
The
operators of the Sakhalin projects seek to increase the Russian content
by contracting with as many Russian companies as possible. Several
Khabarovsk
Krai (territory) companies have successfully won tenders and obtained
contracts
to work on the Sakhalin projects. However, many other Khabarovsk
companies
fall short of becoming contractors, subcontractors, and suppliers
because
they fail to meet high safety, environmental, standardization and other
requirements set by the project operators. Finding a suitable U.S.
partner
could substantially increase the chances of Khabarovsk Krai companies
winning
contracts for supply of machinery, parts, or services and, at the same
time, could help an American company to enter this market.
SAKHALIN PROJECTS OVERVIEW
The Sakhalin oil
and gas projects
were the first in Russia to employ production-sharing agreements
(PSAs).
This approach attracted a huge amount of foreign investment by
providing
favorable tax procedures (substitution of the majority of federal and
local
taxes with product sharing) and guaranties of stability for the whole
period
of the project implementation activities (30-40 years). This, in turn,
allowed for the successful development of these large-scale projects in
harsh environmental and climatic conditions. Sakhalin-1
Sakhalin-1
is the second project implemented under a PSA on the Sakhalin shelf.
The
estimated recoverable reserves of Chaivo, Arkutun-Dagi, and Odoptu
deposits
total 307 million tons of oil and 485 billion cub. m. of gas. The
expected
daily oil production amounts to 250,000 barrels (33,000 tons per day).
Sakhalin-1 project intends to develop these oil and gas resources in
phases,
using both offshore and onshore wells. The first phase of development
will
focus on the Chayvo and Odoptu fields, with first oil expected from
Chayvo
at the end of 2005 and from Odoptu in early 2007. The oil will be
exported
via pipeline to a marine tanker terminal at DeKastri (in Khabarovsk
Krai).
Limited gas production will be available in this initial phase to help
meet Russian domestic demand. Future phases of development envision
construction
of a natural gas pipeline to Japan and development of the Arkutun-Dagi
field.
The consortium developing Sakhalin-1 comprises
U.S., Russian,
Indian and Japanese companies, which will invest as much as $12 billion
throughout the life of the project. The members of the consortium are
Exxon
Neftegas Limited, USA (30 percent shareholder), ONGC Videsh Limited,
India
(20 percent); RN-Astra, Russia (8.5 percent);
Sakhalinmorneftegas-Shelf,
Russia (11.5 percent); and Sakhalin Oil and Gas Development Co., Ltd.,
Japan (30 percent). Exxon Neftegas Limited, a subsidiary of U.S.-based
Exxon Mobil Corporation, is the operator of the project.
According to Neil Daffin, the President of
Exxon Mobil
Limited, once the Sakhalin-1 project has proceeded to the exploitation
stage, the projects’ costs increased considerably. Russian companies
are
winning an increasing number of tenders. In 2002, many Russian
businesses
obtained large contracts, and the overall value of contracts signed
with
Russian suppliers and contractors exceeded $1 billion.
Sakhalin-2
Sakhalin-2 was the first Russian
project to
be implemented under the PSA regime. The total calculated recoverable
reserves
of the two offshore deposits, Piltun-Astohoonskoye (oil deposit) and
Lunskoye
(gas deposit), are estimated at 150 million tons of oil and 642 billion
cub. m. of natural gas. The operator of Sakhalin-2 project is the
Sakhalin
Energy Investment Company Ltd. (SEIC), composed of Mitsui (Japan) - 25
percent share, Mitsubishi (Japan) - 20 percent, and Royal Dutch/Shell
(UK/Netherlands)
- 55 percent. During 1996–2001, approximately $2 billion was allocated
for the project implementation. The direct profit of the Russian side,
including bonuses, payments to the Fund for Sakhalin Development,
reimbursement
of the preliminary Russian expenditures for the exploration activities
was $181 million; Sakhalin Oblast received $154 million.
The Sakhain-2 project is responsible for the
development
of the local industrial infrastructure needed oil and gas production.
The
approved Complex Plan for the project development envisions total
capital
investment exceeding $8 billion. Once the production facilities reach
their
pre-planned production capacities, the annual extraction of oil and
condensate
within the Sakhalin-2 project will amount to 8.5 million tons; natural
gas - 19 billion cub. m.
Sakhalin-3 Sakhalin-3 project encompasses the
development
of two independent projects: Kirinskiy Perspective Block (roughly
687 million tons of oil and condensate, 873 billion cub. m. of natural
gas) and Vostochno-Odoptinskiy & Ayashskiy Perspective block
(roughly
160 million tons of oil and condensate, 67 billion cub. m. of natural
gas).
Both projects require geological and exploration research to determine
the exact volume of recoverable oil reserves and exact location of oil
and gas deposits. The operator and investor of the first project is
PegaStar
(USA); its founders are Mobil Russia Ventures Inc, Texaco Exploration
Sakhalin
Inc, NK Rosneft and Rosneft-Sakhalinmorneftegas JSC. The investors of
the
second project are Exxon Neftegas Ltd, NK Rosneft and
Rosneft-Sakhalinmorneftegas
JSC.
PARTICIPATION OF KHABAROVSK KRAI COMPANIES IN
SAKHALIN
PROJECTS
While striving to maximize Russian content and contract as
many
local companies as possible, the operators of Sakhalin-1 and 2 keep in
mind a number of requirements when evaluating candidates and selecting
eligible contractors and suppliers. Safe operation, compliance with
environmental
regulations and existing legislation, competitiveness of costs and the
ability to deliver the requirements on schedule are among the primary
demands.
The Sakhalin-1 project operator Exxon Neftegas Limited has been
successfully
working with the Sakhalin Oblast Administration and the Russian
Ministry
of Economic Development and Trade to establish a Joint Committee on
Russian
Content. In order to inform Russian suppliers and subcontractors about
the project objectives, standards, and bidding procedures and to
increase
their competitiveness, special Russian supplier seminars were held in
Khabarovsk,
Yuzhno-Sakhalinsk, and Moscow. Russian and English-language websites
(www.sakhalin1.com
and www.sakhalin1.ru) were launched to inform potential contractors and
vendors about major contracting opportunities and upcoming tenders.
Activation of the Sakhalin oil and gas
projects during
the last 3 years resulted in an increase of the Khabarovsk Krai
companies’
participation. As of early 2003, six major contracts were signed with
the
Khabarovsk Krai companies worth some $200 million. Current Sakhalin
contractors
are Amurskiy Shipbuilding Yard (Komsomolsk-on-Amur), Vostok airline
(Khabarovsk),
and Dalmostostroy (Khabarovsk). Three Khabarovsk Krai design
institutes--
DalTISIz, Dalaeroproekt, and Dalgidrovodokhoz--have also been
extensively
involved in the projects.
Transportation Companies On June 2003,
Exxon Neftegas
Limited signed its second 5-year contract with Vostok airlines JSC from
the Khabarovsk Krai. The company was established in 1945 and in 1993.
Fifty-one
percent of the airline’s shares belong to the federal government, 22.75
to the Krai government, and 26.25 percent to private shareholders.
Vostok’s
primary fleet consists of seven Mi-8MTV helicopters, Mi-8T, six An-28
planes,
and three An-38-100 planes. Since 2001, Vostok is an official provider
of airline services for the United Nations in East Timor.
Vostok obtained its first Sakhalin contract
for the provision
of air transportation services in 1997, surpassing four competitors.
Although
this was the airline’s first exposure to the contractors’ selection
system,
it was able to comply with tough requirements of the project operator,
which included the availability of the fully prepared aircraft, flight
safety management systems, and qualified aircrew and technical
personnel.
Especially strong attention was paid to personnel discipline. In order
to be eligible for participation in the Sakhalin-1 project, Vostok
airline
had to obtain some specialized certificates.
Construction Companies In autumn 2002, Exxon
Neftegas
Limited contracted with Dalmostostroy JSC (Far Eastern Bridge
Construction
Company, Khabarovsk) for the construction of Chaivonskiy Bridge. The
830-meter
bridge will connect the drilling site on the Chaivo Island with the
coastal
product-processing complex. The passage will first be used to transport
heavy (600 tons) production equipment, and after production begins will
serve for the daily transportation of personnel and cargo to the
drilling
site.
Construction of the Chaivo bridge is one of
several projects
recently passed over to Russian subcontractors by ABB Lummus Global
(Moscow)
as a part of the company’s own contract for the detail planning,
logistics
support, and construction of coastal facilities for Sakhalin-1 project.
The other projects involve SakhNIPImorneft (design) and
Sakhalinmorneftemontazh
JSC (general construction) Sakhalin companies and Amurskiy Shipbuilding
Yard (Komsomolsk-on-Amur, Khabarovsk Krai). The shipyard was contracted
for the construction of 54 reservoirs for storage of diesel fuel and
hydrocarbon
base for drilling liquid.
In 1996, Amurskiy Shipbuilding Yard JSC became
a prime
contractor of Sakhalin Energy to modernize Moliqpak, an offshore
oil-drilling
platform. In 2002, the shipyard and Exxon Neftegas Ltd signed a
contract
on refitting and modernization of Orlan, an oil-drilling platform in
the
framework of Sakhalin-1 Project. Other parties of the $140 million
contract
include Hyundai (Republic of Korea) and Natchik (USA). As a result of
the
shipyard’s new contract to refurbish the Orlan platform, its partner,
FIAS
(USA) obtained a $ 31 million contract to act as the procurement
company
- procuring all parts of equipment and dealing with certification,
inspection,
and logistics.
The shipyard intends to expand its
participation in Sakhalin
projects and plans to lease working premises at the Severny shipyard
(Sovgavan).
The shipyard’s primary business activity is production of machinery
(propellers,
shaft, steering gear, winches, capstans, ladders, bridge bearings,
screws,
etc.). In general, the yard comprises hull, assembly and welding, pipe
assembly, machinery, metallurgical, heat treatment production, a
testing
center, and electroplating shops. The enterprise produces sea and river
vessels, vessels with air pillow maintenance, vessels with hydrofoil
wings,
ocean trawlers and refrigerators, and others.
Over 60 Khabarovsk Krai companies have
submitted applications
for participation in upcoming Sakhalin tenders. Even a larger number of
Krai enterprises wish to become suppliers or contractors of the
Sakhalin
oil and gas projects. The primary reasons why many Khabarovsk Krai
companies
failed to win tenders are lack of international business experience;
failure
to produce equipment that meets the environmental, climatic, technical
or ergonomic requirements; failure to ensure stable on-time delivery of
their products and/or services to the destination site; poor safety
records;
and a lack of quality and standards certifications.
Many of Khabarovsk Krai enterprises are
willing to establish
joint ventures with U.S. companies so that they can expand their
services
and improve the quality of their products to meet higher international
quality requirements. At the same time, the U.S. companies could also
benefit
from such partnership and become subcontractors to their Russian
partner
or win subsequent tenders to supply equipment, machinery, parts,
services,
etc.
CONSORTIUM OF THE RFE ENTERPRISES In
order to promote
the participation of Khabarovsk Krai companies in Sakhalin oil and gas
projects and increase their competitiveness through informational and
legal
support, the Krai Government and a number of large manufacturers,
suppliers,
services providers, transportation companies and design institutes seek
to establish a consortium of Russian Far East companies. The consortium
will obtain the legal entity status once it receives state
registration.
Its headquarters will be located at Amurskiy Shipbuilding Yard JSC, and
the shipyard’s director will be responsible for the organization of the
consortium structure and attraction of Khabarovsk manufacturers and
suppliers
to participate in the construction of the Orlan platform.
The consortium will assist its members in
completing tender
application documents for the preliminary competition and selection
stages
and organize and conduct specialized training seminars and courses for
the top managers of the companies. It will also provide informational
services,
including compiling of databases, conduct and participate in
symposiums,
conferences, exhibitions and other events. The members of the
consortium
seek to develop partnerships with similar foreign and international
organizations
to share experience. The consortium’s activities are expected to
increase
Khabarovsk firms’ chances of obtaining contracts.
CONTACT INFORMATION
U.S. Consulate General Vladivostok U.S.
Commercial Service
32 Pushkinskaya St., Vladivostok, Russia Tel: (7-4232) 49-93-81 Fax:
(7-4232)
30-00-92 Email: William.Lawton@mail.doc.gov Contact: William S.
Lawton,
Principal Commercial Officer BISNIS in Khabarovsk 18
Muravyeva-Amurskiy Street, office 307 Khabarovsk 680000, Russia
Tel/Fax:
(7-4212) 305-757 Email: bisnis@vasandr.kht.ru www.bisnis.doc.gov
www.bisnis-eurasia.org Contact: Andrei Vasenyov, BISNIS representative
For contact information of relevant Khabarovsk
krai officials
and brief descriptions/contact details of Khabarovsk Krai Companies
that
are acting and potential contractors of Sakhalin oil and gas projects,
please contact
Ellen House, BISNIS trade specialist for the
RFE
email: Ellen_house@ita.doc.gov, tel: 202-482-2284 or Chris Christov,
BISNIS
trade specialist for oil and gas sector email:
chris_christov@ita.doc.gov,
tel: 202-482-4199
To use MyBISNIS, go to:
www.bisnis.doc.gov/MyBISNIS.cfm
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