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Sakhalin-1 Project Receives Award for Excellence Nov 2008

ExxonMobil Announces Drilling of World-Record Well Sakhalin-1; 7 mi April 24, 2007 Gazprom and Shell Finalize Sakhalin II Deal  Shell 4/18/2007
Russia Discusses Majority Control of

Sakhalin Energy Projects 5/26/2006
Russia Report: Sakhalin Island November 2005

Shell is ‘hanging in there’ on Sakhalin Island as Russia increases the pressure
Sakhalin island looks to boost its visibility

The giant Sakhalin Phase II project

will test the skills of shell’s EP Projects team.
Sakhalin New Modules Installed on Molikpaq Sakhalin II Offshore Pipe Laying Completed Ahead Schedule

Sakhalin-1 Project Receives Award for Excellence
From International Petroleum Technology Conference KUALA LUMPUR, Malaysia--(BUSINESS WIRE)

ExxonMobil announced today that the Sakhalin-1 project has earned the Excellence in Project Integration Award from the committees and sponsoring societies of the International Petroleum Technology Conference (IPTC).

The award recognizes the project for successfully integrating geoscience knowledge; reservoir and production engineering; construction and facilities engineering practices; safety, health and environmental processes; human resources policies; community programs; and overall project teamwork.

“We are extremely proud of the Sakhalin-1 project achievements,” said Mark Albers, senior vice president, Exxon Mobil Corporation (NYSE:XOM). “The Sakhalin-1 project is one of the largest energy investments in Russia and is a testament to international cooperation to successfully execute this project in one of the most challenging arctic environments in the world in a safe and environmentally responsible manner.”

Exxon Neftegas Limited (ENL), an ExxonMobil affiliate, holds a 30 percent interest in and operates the multi-billion dollar Sakhalin-1 project.

The project received the award at a banquet at the Kuala Lumpur Convention Centre on the opening day of the conference, which more than 4,000 oil and gas scientists, engineers and other professionals from throughout the world are attending. The sponsoring organizations for the IPTC include the American Association of Petroleum Geologists, the European Association of Geoscientists and Engineers, the Society of Exploration Geophysicists, and the Society of Petroleum Engineers.

Since 2005, the Sakhalin-1 project to develop the Chayvo field in the Sea of Okhotsk has produced more than 157 million barrels of crude oil for export to world markets. It also has been a key supplier of natural gas to Russia’s Far East. Consumers there have received over 105 billion cubic feet of gas to heat their homes and meet growing energy needs. Gas produced by the project will continue to help meet natural gas demand in this region for many years to come.

Sakhalin-1 project development has involved many accomplishments:

    * Three-dimensional seismology, invented by ExxonMobil, increased exploration success and reduced finding costs.
    * To plan operations in seas with ice six feet thick, state-of-the-art computer models, based on 5 years of ice data, calculated ice loads on the offshore production platform.
    * The design of the facilities is protective of the Western Gray Whale, the Orlan eagle and other wildlife native to Sakhalin Island.
    * Employees have worked over 80 million hours with industry-leading safety performance.
    * Detailed and integrated front-end execution planning, utilizing a phased development strategy and a large module “plug-and-play” approach, allowed the project to capture efficiencies and minimize risk.
    * The world's most powerful land-based rig drilled vertically and horizontally beneath the sea floor to the Chayvo field, located 5 to 7 miles (8 to 11 kilometers) offshore to set 17 world records for extended-reach drilling. It also set new records for drilling speed.
    * Contracts valued at over $5 billion have been awarded to Russian companies or joint ventures.
    * The project has funded over $120 million in Sakhalin infrastructure improvements, including hospitals, clinics, roads, bridges, harbors, airports, and power and water facilities. It also has provided over $3.5 million in charitable contributions to local community organizations, including health, youth, arts and civic projects.

The co-venturers with ENL in the Sakhalin-1 project include the Japanese consortium SODECO (30 percent), the Indian state-owned oil company ONGC Videsh Ltd. (20 percent), and affiliates of Rosneft, the Russian state-owned oil company, Sakhalinmorneftegas-Shelf (11.5 percent) and RN-Astra (8.5 percent).

In addition to the Sakhalin-1 project, another development in which ExxonMobil has an interest, the RasGas LNG Train 5 project, is also a 2008 IPTC award recipient.

Gazprom and Shell Finalize Sakhalin II Deal
Shell 4/18/2007

The shareholders of Sakhalin Energy Investment Company Ltd. (Sakhalin Energy), operator of the Sakhalin II project, today signed a Sale and Purchase Agreement with OAO Gazprom to trigger the transfer of shares in Sakhalin Energy.

This transaction implements a protocol signed on December 21, 2006 in Moscow. Under its terms Gazprom acquires a 50% plus one share stake in Sakhalin Energy for $7.45 billion in cash. The other three shareholders, Royal Dutch Shell, Mitsui & Co. Ltd and Mitsubishi Corporation, each dilute their stakes by 50%, to receive a proportionate share of the purchase price.

Gazprom will now hold 50% plus one share, Shell 27.5%, Mitsui 12.5%, and Mitsubishi 10%.

With LNG capacity effectively sold, Sakhalin II is moving to firmly establish its position on the global energy map as a reliable new energy source for customers. Through the Area of Mutual Interest (AMI) arrangement with Gazprom, the prospects for expansion of Sakhalin II through further LNG processing trains are enhanced.

In addition, the Ministry of Natural Resources of the Russian Federation has announced its approval of the revised Environmental Action Plan (EAP).

Gazprom Deputy Chairman Alexander Medvedev said, "Gazprom's entry into Sakhalin II is a powerful impetus for implementation of this large scale development in the area of energy export to Asia Pacific and North America. In turn, it will facilitate the company's strategy of phased entry into the global LNG market."

Shell's Executive Director, Exploration and Production, Malcolm Brinded said: "Gazprom's entry into the Sakhalin Project is warmly welcomed. Combined with the government acceptance of the Environmental Action Plan, this is another important step for Sakhalin II. The AMI should create additional growth opportunities for the partners in the future."

Mitsui's Executive Director and Executive Vice President, Hiroshi Tada said: "Mitsui is pleased to welcome Gazprom to the Sakhalin II team. With the entry of Gazprom as Sakhalin Energy major shareholder, we are confident that in cooperation with the Russian Government, can bring this first Russian frontier LNG project to completion, as scheduled, for delivery of LNG to out customers in Japan, Korea and the United States. The milestone achieved today will no doubt contribute to further strengthening of the relationship between Russia and Japan, and will pave the way towards future development in Sakhalin region."

Mitsubishi's Senior Executive Vice President, Hisanori Yoshimura said: "Mitsubishi welcomes Gazprom into the Sakhalin II Project as a majority shareholder. I trust that this new combination of shareholders is the best team to accomplish timely start-up of LNG delivery to important customers in Japan, Korea, and North American West Coast. This is an important step towards Sakhalin Energy becoming the key LNG supplier for Asia Pacific market."

Sakhalin is a new world-class oil and gas province, with estimated resources of some 45 billion barrels of oil equivalent (boe). Sakhalin II is the largest integrated oil and gas export project in the world, with total resources of some 4 billion boe.

Sakhalin II today has production capacity of 80,000 boe per day during the production season. The subsequent phase of the development will take the total project capacity to 395,000 boe per day, including 9.6 million tonnes per year of LNG production.

The second phase of the project is over 80% complete. More than 17,000 workers are currently employed in the construction of the project, of which around 70% are Russian nationals. The planned LNG production has been sold under contract to customers across the Asia-Pacific region.

Sakhalin II includes the following elements:

- Offshore production facilities including the Molikpaq platform (Piltun Astokh-A), the new Piltun Astokh-B and Lunskoye-A platforms and some 300 km of offshore pipelines;

- An onshore processing facility to take the gas and crude oil from both fields;

- Onshore oil and gas pipelines to the south of the island;

- An oil export facility capable of year-round operation;

- The first LNG plant and associated export facilities built in Russia;

- Island infrastructure upgrades, such as roads, bridges, rail, port, airport, and medical facility upgrades.

Shell, Mitsui and Mitsubishi have entered into an Area of Mutual Interest arrangement with Gazprom that gives Sakhalin Energy and its shareholders priority for expansion, growth and new business opportunities in the wider Sakhalin area. This includes the purchase of third party gas and the bidding for, and acquisition of, certain blocks in the area.

The revised Environmental Action Plan (EAP) was prepared by Sakhalin Energy with input from shareholders and Gazprom and submitted to Ministry of Natural Resources in March 2007. The revised document includes Sakhalin Energy's measures to enhance contractor management for environmental impact during the onshore pipeline construction. The revised plan sets out detailed action points, action parties and close-out dates.

The Sakhalin II EAP goes beyond the practical aim of merely addressing non-compliances during the pipeline construction. It also provides targets and action points for conservation of biodiversity of Sakhalin Island, including fish stocks and rare flora and fauna species. 

ExxonMobil Announces Drilling of World-Record Well Sakhalin-1; 7 mi
Sakhalin-1 Project Drills Well Exceeding Seven Miles in Length April 24, 2007

IRVING, Texas--(BUSINESS WIRE)--Exxon Mobil Corporation (NYSE:XOM) announced today that its subsidiary, Exxon Neftegas Limited (ENL), has completed drilling of the Z-11 well, the longest measured depth extended-reach drilling (ERD) well in the world. Located on Sakhalin Island offshore Eastern Russia, the record-setting Z-11 achieved a total measured depth of 37,016 feet (11,282 meters) or over seven miles.

The multiphase Sakhalin-1 Project includes the Chayvo field which is located 5 to 7 miles (8 to 11 kilometers) offshore. The Z-11 was drilled to the Chayvo reservoir from the Yastreb rig, the world's largest land-based drilling rig. Overall, the Chayvo field reached its peak production rate of 250,000 barrels (34,000 metric tons) per day in February 2007 after an on-schedule startup in October 2005. The Z-11 is the 17th ERD producing well to be completed as part of the Sakhalin-1 Project. It was drilled in 61 days, more than 15 days ahead of schedule and below expected cost with no safety or environmental incidents.

Since the first Sakhalin-1 well was drilled in 2003, the time required to drill these world-class wells has been reduced by more than fifty percent. When compared to industry benchmarks, Sakhalin-1 wells are the world's fastest drilled ERD wells.

"ExxonMobil, through the operatorship of Exxon Neftegas Limited, is pleased that the Sakhalin-1 Consortium achieved this record-setting milestone," said Neil Duffin, president of ExxonMobil Development Company. "Our consortium is committed to the continuing development of the Sakhalin-1 Project which will require significant investment, planning, execution, operating expertise and the employment of leading-edge technology."

The project team applied ExxonMobil proprietary technologies, including Integrated Hole Quality (IHQ) technology and the Fast Drill Process, to deliver the Z-11 well.

"The physics based modeling and experimental validations of our IHQ technology allowed us to successfully design and drill the Z-11," said Steve Cassiani, president of ExxonMobil Upstream Research Company. "With this technology we were able to take into account a broad range of interdependent design variables including rock strengths, stresses, and wellbore hydraulics to successfully drill this well."

Used in conjunction with IHQ technology was an optimization process called Fast Drill, which is a unique energy-based analysis tool and work process that allows rig site and drilling engineering personnel to maximize performance in every foot of hole drilled.

The Sakhalin-1 Project will bring significant economic benefits to Russia including over US$50 billion in direct revenues to the Russian state, major infrastructure improvements, technology transfer and the supply of natural gas to customers in the Khabarovsk Krai in the Russian Far East. Notably, over 80 percent of the Sakhalin-1 Project drilling rig operators are Russian nationals and project contract awards to Russian companies have reached approximately US$3.8 billion.

Exxon Neftegas Limited (30 percent interest) is operator for the project, which includes the Japanese company Sakhalin Oil and Gas Development Co. Ltd., (30 percent); affiliates of Rosneft, the Russian state-owned oil company, RN-Astra (8.5 percent), Sakhalinmorneftegas-Shelf (11.5 percent); and the Indian state-owned oil company ONGC Videsh Ltd. (20 percent).

Sakhalin II Offshore Pipe Laying Completed Ahead Schedule
Sakhalin Energy 8/30/2006

In a season of milestone achievements, Sakhalin Energy has reached another significant milestone by completing the laying of its Piltun area offshore pipelines ahead of schedule, thus concluding all offshore pipelaying work for the Sakhalin II Phase 2 Project.

Sakhalin II Deputy CEO and Phase 2 Project Director David J. Greer underlined the importance of this achievement: not just for the Project, but also because it was achieved without impact to the Piltun environment, the area most sensitive to the Western Gray Whales (WGW).

An extensive noise monitoring campaign throughout the 2006 offshore season, also monitored in parallel by NGOs, showed that construction never exceeded the established noise criteria. With the work now finished ahead of schedule, the Company has been able to start demobilizing vessels in advance of original plans, effectively minimizing the overall acoustic footprint.

"All of Sakhalin Energy's efforts over the last few years, including our extensive investment, research and ongoing work with the independent WGW experts, bring us to where we are today – announcing that we have safely and successfully finished our offshore pipelaying work without having compromised the safety of the endangered Western Gray Whale", said David Greer. "This is something that the Company is extremely proud of."

Sakhalin II's offshore pipeline – consisting of extra-heavy pipe with thick concrete coating to ensure stability under all conditions – in water depth shallower than 30 meters has been buried in a deep trench to protect against ice scouring.

This year's offshore pipeline works followed on from the work Sakhalin Energy completed in summer 2005 in the Lunskoye area. The 2006 summer work has included dredging, installation and backfilling works on four separate pipelines: an oil and a gas pipeline from Chaiyvo beach to the new Piltun-B platform; and an oil and a gas line from Chaiyvo beach to the existing Piltun-A platform (Molikpaq). Total combined length of these pipelines exceeds 230 kilometers.

With pipelaying now complete, the only outstanding offshore pipeline work involves divers making the final connections between the pipelines and the platforms. This is planned to be done before the end of the 2006 offshore construction season and will be followed by hydrotesting of the pipelines.

The offshore pipeline work forms an important element of the Sakhalin II Phase 2 Project. Among other elements are Russia's first LNG plant, oil export terminal, onshore pipelines, two new offshore platforms and onshore processing facility. Overall design, procurement and construction work on the Phase 2 project is currently over 75% complete.
Shell is ‘hanging in there’ on Sakhalin Island as Russia increases the pressure
Published: Monday, 4 December, 2006, 01:01 PM Doha Time

Cargo ships and cranes are pictured at Korsakov Port on Sakhalin Island. Shell is depending on Sakhalin to help boost reserves and revive falling output. It is scheduled to begin liquefied natural gas exports to Asia in summer 2008.

LONDON: Royal Dutch Shell is “hanging in there”, company sources say, as Russia squeezes its $22bn Sakhalin-2 oil and gas project over cost overruns, environmental violations and to secure a stake for state firm Gazprom.
Sakhalin-2 on the Pacific island of Sakhalin, north of Japan, is one of the world’s biggest and most ambitious energy projects and the largest foreign direct investment in Russia, according to operator Sakhalin Energy.
The deal, one of three similar projects Russia signed in the 1990s, was supposed to mark a new era of co-operation.
But the project, led by Shell and involving Japan’s Mitsui and Mitsubishi, has recently soured along with other foreign investments in Russia.
“We’re hanging on in there,” said a Shell source who declined to be named.
“There’s no issue with the schedule or with the total cost at the moment. The longer it goes on, the more difficult it gets of course.”
A doubling of costs has infuriated Russia because under the terms of its production sharing agreement with the companies Russia will not see any profit until the costs are recouped. Near-record oil prices have only added to Russia’s frustration.
Russia’s environment agency RosPrirodNadzor, has accused Shell of inflicting ecological damage to Sakhalin, a feeding ground for gray whales, and threatened legal action.
It says contractors have illegally cleared forests, dumped soil in rivers and laid pipelines in areas prone to mudslides.
Shell says it is working with Russia to find a solution. Chief executive Jeroen van der Veer has said he hopes to “resolve issues and misunderstandings through discussions.”
In private, Shell sources say it is increasingly difficult to know who in Russia is calling the shots.
“Now it’s got $20bn costings, different ministries and RosPrirodNadzor are saying: ‘There are environmental violations and we could shut you down for not painting around the doorhandles’,” said a source familiar with the Sakhalin project.
“And who’s in control. Is it the Ministry of Natural Resources, the Ministry of Economic Development or is it Gazprom?”
Another Shell source said Russian self-confidence had grown in tandem with surging oil prices. The world’s second biggest oil exporter and holder of the biggest gas reserves is keenly aware how important its energy supplies are to Europe and Asia.
Foreign operators Shell, ExxonMobil and BP are finding the negotiating climate increasingly tough.
“The Russian negotiating leverage is in a different place than it was. They are more self confident than they once were and they feel that anybody’s fair game,” the Shell source said.
Shell is depending on Sakhalin to help boost reserves and revive falling output. It is scheduled to begin liquefied natural gas (LNG) exports to Asia in summer 2008, later than earlier planned. Shell spokesman Andy Corrigan said Sakhalin-2 was on track to start LNG exports in 2008.
The project involves drilling for oil and gas in the Pacific Ocean, pumping it through 800km-long pipelines along the island, which lies in an earthquake zone, and turning the gas into liquid at a giant LNG plant.
Russian gas export monopoly Gazprom plans to take a 25% stake in Sakhalin-2 through an asset swap with Shell but the doubling of the budget has created disarray.
Gazprom may now demand a greater stake, taking some equity from Shell’s partners Mitsui and Mitsubishi. Shell currently has 55%, Mitsui has 25% and Mitsubishi 20%.
Sources close to Shell said that was a possible outcome.
“There is a lot of discussion taking place. We don’t know where it will end up, they don’t know where it will end up, but I think both sides have a vested interest in it being a fair outcome,” said the Shell source.
Corrigan said talks with Gazprom were continuing, but declined further comment.
Russian state auditor Sergei Abramov said on Monday he expects the Sakhalin-2 partners to accept a change in the terms of the production sharing agreement (PSA) that governs the project to improve Russia’s share.
While Abramov said Russia would not unilaterally revise the PSA, it would never agree to a budget of $22bn.
“Shell will have to come to terms with the fact that it has disappointed the Russians,” another Shell source said. – Reuters
Sakhalin New Modules Installed on Molikpaq
Sakhalin Energy 7/20/2006

Sakhalin Energy reported that it has successfully completed the installation of the Molikpaq Tie-In (MTI) modules.

As part of the construction and installation program of July, two intricate modules--each the size of a 10-story apartment block--were successfully lifted into position on the space-constrained deck using the Castoro 8, a mobile crane barge. In addition a new multi-million-dollar crane assembled locally in Kholmsk was also installed successfully.

David Greer, Sakhalin II project director, referred to the Molikpaq Tie-In installation as “representative of engineering at its finest.” He congratulated the team involved in the installation on “getting the job done professionally and efficiently.”

The Molikpaq platform, which is the heart of the Vityaz Production Complex, is located in Astokh Feature of Piltun-Astokhskoye oil field, 17 kilometers offshore northeastern Sakhalin Island. Currently, because of the challenging ice conditions in the Okhotsk Sea, the platform is producing some 6 months a year during the ice-free season.

Sakhalin Energy commenced the commercial development of Piltun-Astokhskoye field in 1999. In seven work seasons since the 1999 first oil, Molikpaq has produced more than 70 million barrels of oil. The new modules will be part of the connection between the platform and the new onshore and offshore oil and gas pipelines, which are currently under construction. This will allow year-round production of oil and gas from the Molikpaq.

First year-round production from the Molikpaq is expected in 2007.
Russia Discusses Majority Control of Sakhalin Energy Projects 5/26/2006
M2 Communications

Russia's Ministry of Natural Resources said Thursday that two large oil projects operated by Exxon Mobil (NYSE: XOM) and Royal Dutch Shell PLC (NYSE: RDS) should be turned over to local companies.

The statement follows steps by the Russian administration to exert more government control over its energy sector. The ministry didn't specify what steps, if any, should be taken regarding Exxon's Sakhalin-1 and Shell's Sakhalin-2 projects.

Western analysts said the statement was likely a negotiating tactic designed to improve Russia's position at an upcoming summit. Russia has come under pressure to liberalize its energy industry and the country is expected to make energy security a key topic when the leaders of industrialized nations meet in July.

Russian companies currently control minority stakes in the discussed projects. OAO Rosneft, the state oil company, controls 20 percent of Sakhalin-1 while OAO Gasprom, the sate gas company, is in negotiations for a 25 percent share of Sakhalin-2.

The Sakhalin negotiations took almost ten years to complete and have substantially increased foreign investment in the region. Given the complexity of the contracts, it's highly unlikely the Russian government will reopen the contracts, despite their desire for domestic control.

In a report, the Russian Academy of Sciences attacked the foreign controlled projects for delays, cost overruns and not accounting for Russian interests. The Ministry endorsed that report in a statement Thursday.
Russia Report: Sakhalin Island November 2005
Long-term projection for sustained export gas production from Chayvo, Odoptu and Arkuntun-Dagi to 2050

ExxonMobil marks milestone with Sakhalin-1 start-up
Chayvo field development expected to continue for a year
Pam Boschee International Editor Offshore November 2005 –

Once a penal colony unrecognized by much of the globe, Sakhalin Island now is a remote location gaining operational and technical prominence in the international oil and gas industry. With production start-up last month in the first phase of the Sakhalin-1 project, ExxonMobil's subsidiary, Exxon Neftegas Ltd. (ENL), began tapping the rich oil and gas reservoirs of offshore eastern Russia.

The initial phase of the project will produce 50,000 b/d of oil by yearend 2005 and 250,000 b/d by year-end 2006 from the Chayvo field.
Companion Russian domestic gas sales will start at about 60 MMcf/d and are ultimately expected to increase to about 250 MMcf/d by the end of the decade.

Sakhalin-1 includes the Chayvo, Odoptu and Arkutun-Dagi fields.  Together they contain an estimated 307 million tons of oil and 485 bcm of gas.

Sakhalin-1 was declared commercial at the end of 2001 and has an economic life of about 40 years.
ENL (30% interest) serves as operator of a consortium that includes: Japan's Sakhalin Oil and Gas Development Co. Ltd. (30%); Russia's Rosneft affiliates, RN-Astra (8.5%), Sakhalinmorneftegas (SMNG)-Shelf (11.5%); and the National Oil Co. of India, ONGC Videsh Ltd. (20%).
Click on Image for Large Picture
Once full production starts, crude oil will be processed at the onshore processing facility at the rate of about 250,000 b/d of oil and 800 MMcf/d of gas.

Sakhalin-1 by the numbers
* Ranks as one of the largest single foreign direct investment projects in Russia today
* $40 billion in taxes, royalty payments, and state share of oil over the life of the project
* $100 million to the Sakhalin Development Fund over a five-year period
* $45 million in production bonuses
* $3.2 billion in contrast awards to Russian companies (represents about two-thirds of total contracts to date)
* $200 million in Sakhalin infrastructure upgrades
* 13,000 direct and indirect local jobs will be created during the construction phase

View from the top
In a recent interview with Offshore, ENL’s President and ExxonMobil Development Co.'s Sakhalin-1 Project Executive Steve Terni talked about Chayvo's production future and later development of Odoptu and Arkutun-Dagi. 'We've installed two drilling Facilities in this first phase.
One is the Yastreb, the onshore rig, which uses extended-reach drilling to tap reserve six miles from shore.  At the same time, we set in place the Orlan light over the Chayvo reserve and will drill from there." Yastreb, which means "hawk" in Russian, is the world's largest land-based drilling rig - 22 stories tall - using extended-reach drilling (ERD).

Orlan ("white-shouldered sear eagle") will provide drilling capacity for up to 20 wells. Yastreb is the largest fully winterized (+40/40'C) and most powerful rig in the industry, according to ENL With 12,000 hp (about 9,000 Kw) the rig 4 1600 mud pumps at 7,500 psi (about 500 bar).  It is skid-mounted for batch drilling seismic design and is designed to withstand earthquakes. ENL says the rig's mud system is also unique in the industry.

Compared with most rigs' 1,000 bbl capacity mud system, says ENL, Yastreb has a 2,000-bbl active, a 2,000-bbl reserve, and a 5,000-bbl bulk storage system. The company adds that the rig has a pipe barn, which no other land rig has, which was designed to bring tubulars in, take them up, and store them. 

They can be picked up in 90-ft sections instead of 30-ft sections. Combined, Yastreb and Orlan will drill more than 30 ERD wells, which will be the largest number of such wells in any one location globally.

To date, seven ERD wells (four oil producers, two gas producers, and one injector) have been drilled at Chayvo and readied for initial production.

The Orlan Platform sits right over the Chayvo reserve.

Chayvo Z-2 (11,134 m) and Z-1 (10,995 m) are the third- and fourth longest ERD wells in the world, says ENL Z-2 is the longest ERD well ever drilled by ExxonMobil. Chayvo also claims the world's first 13 5/8in. casing installation using "mud over air" floatation and world record coiled tubing runs.

Terni says there will also be an onshore processing facility (OPF). The well streams from the two sets of wells will flow to the OPF and "from there we'll be treating and selling some gas to domestic customers on the mainland of Russia.  Those 20-year contracts are in place, and the customers are already receiving their gas."

Once full production starts, crude oil will be processed at the OPF at the rate of about 250,000 b/d of oil and 800 MMcf/d of gas, says Terni.  A 225-km export pipeline is being built from the OPF to the DeKastri export terminal, where crude will be loaded to specially designed tankers for delivery to international markets.  With icebreaking support vessels and strengthened tankers, required because the strait between the mainland and the island is covered by ice for six months annually, year-round shipping will be possible, he adds.

“The oil will be initially sold into the domestic market until our export facility is complete, but the long-term plan is to export oil.  Once that starts around mid next year, we won't sell any more oil into the domestic market.”

Initial natural gas production will be sold to two domestic customers, OAO Khabarovskenergo and OAO Khabarovskkraigas in the Khabarovsk Krai in the Russian Far East buyers will transport the gas to the Khabarovsk Krai through the pipeline systems of SMNG-Shelf and Daltransgas. There will be surplus gas that will have to be re-injected until such time as we develop the export market for the balance of the gas.  We're in discussions with the Chinese and Japan for possible delivery by pipeline. "We don't have an anticipated date for initiation for that delivery.  We are in discussions now with CNPC in China, but no agreement has been concluded as yet." Long-term projections are for sustained export gas production from Chayvo, Odoptu and Arkutun-Dagi to 2050.

Maximizing on lessons learned
Terni says, “The full development of Chayvo includes oil development in the initial investment phase with the companion domestic gas sale; the next step could be the development of the long-term export gas contract, which would be supplied from new additional wells at Chayvo.

“The development of the other fields will follow as capacity becomes available in the export pipeline system and at the processing facility.  The current plan is to bring Odoptu on next.

"What we're trying to do is optimize the use tight now of the Yastreb rig and the other facilities at Chayvo.  The rig has a full schedule for drilling wells this coming year, and once that's done, it could be moved up to Odoptu and begin drilling there. "However, if we enter into an export gas contract, then we'll leave Yastreb at Chayvo and consider another rig for Odoptu."

He adds that the benefit of the company's step-wise development of the fields is that "we're taking one economic bite at a time." Each of the steps will be justified on its own merits.  “We'll be able to take learning from our actual operating and execution experience in this remote location and frontier area and put that into our planning for subsequent phases.  This will help us not only improve the management of the reservoirs from the operational perspective, but also help us control costs and finalize execution strategies for future phases."

With Russian participation in construction at around 70% at the Chayvo site, Terni says the company is "getting to know the contractor community," and the local resource base is growing with vendors and service contractors who are establishing themselves now in the new market and who "will be available for us the next time around."

He also discussed the challenges of finding qualified manpower for a project of this scale on an island with an unemployment rate of only 1.5%. "If you look at the combination of operations and construction, the demand for people is very high.  With this unemployment rate, there really is no pool of labor on the island per se.  Many of our Russian contractors bring in skilled labor from other parts of Russia.  That's one source, and then there are some foreign contractors as well, engineers and skilled labor from other parts of the world."

For foreign contractors and service providers who are interested in doing business with ExxonMobil for development of the remaining two fields, Terni recommends, "their best strategy is to hook up with Russian companies and learn how to do business in Russia."

"We're clearly going to be looking to domestic sources as a priority in terms of maximizing our Russian content.  That has worked well in the first phase where foreign companies have worked directly with Russian companies to do much of our project, and I believe that will be the modus operandi in the future as well."

For further information about Russian companies now involved in Sakhalin, or about future contracting opportunities (all contracts have been awarded for Chayvo), visit, “contracting.”


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
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.) 

BISNIS Russian Far East/Oil and Gas Update, 21 July 2003


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.


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 ( and 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.


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.


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:  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: 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:, tel: 202-482-2284 or Chris Christov, BISNIS trade specialist for oil and gas sector email:, tel: 202-482-4199

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