D-Day for Sakhalin Energy
YUZHNO-SAKHSLINSK, 15 May 2003 - The Sakhalin-2 project is
rapidly moving forward with the final go-ahead of the project’s
second phase, a positive investment decision by the shareholders and
two long-term liquefied natural gas (LNG) sales agreements in the
time frame of one week.
May 15 was D-Day for Sakhalin Energy (SEIC) with the ‘Declaration
of Development Date’ for the Lunskoye field, following a positive
investment decision by the shareholders and the signing of a
long-term LNG deal with Tokyo Gas for the supply of 1.1 million
tonnes per year for a period of 24 years. On May 19, SEIC signed
another long-term agreement with Tokyo Electric for the supply of
1.2 million tonnes per year for a 22-year period.
Together, the contracts make almost a quarter of the planned
production capacity of 9.6 million tonnes per year. "Believe me,
that is a real significant achievement in the tough market
conditions for LNG which prevails nowadays," said SEIC Technical
Director Engel van Spronsen, adding he expected further
announcements on LNG sales to be made in the near future. Although
full production capacity will not be reached in the start-up year
2007, the company expects to get to full capacity as quickly as
possible. "I am not aware of any LNG plant in the world that
actually has spare capacity," Van Spronsen said.
Head of the Sakhalin oil and gas department Galina Pavlova said
the multi-year marathon to make the Sakhalin projects a reality had
come to an end and that the actual preparations for oil and gas
production could begin. "This is a very significant event," she
Major contracts for the construction of the second phase of the
project will be awarded in the next few months. Van Spronsen said
Sakhalin Energy reached an initial agreement for the LNG plant
construction with a consortium with Transstroy and Chiyoda, but the
full engineering, procurement and construction (EPC) contract for
the world’s largest and Russia’s first 2.5 billion dollar LNG plant
has not been awarded yet and can be expected in the next two months
when construction will start subject to final approvals from the
Work at the pipelines and the onshore processing facility, again
subject to government approvals, will start at the end of this year.
Outside Sakhalin, in Vostochny, Russian Far East, the company will
start constructing the base for the new platform this year, which
will be placed off the northeast coast of Sakhalin.
Speaking on May 15, after the shareholders had made the positive
investment decision, Royal/Dutch Shell Chairman Philip Watts said
"this is a strategic legacy project for Shell that will help unlock
the vast energy reserves of the Russian Federation". Shell, which
holds a 55-percent share in Sakhalin Energy, is currently world
leader in LNG, producing nine million tonnes per year, a figure that
with Sakhalin alone would double.
Shoei Utsuda, President and Chief Executive Officer of Mitsui &
Co., which holds a 25-percent share, said the Sakhalin-2 project
marks the first gas export from Russia to Asia. "With its vast
resource and proximity to the market, the project has the potential
to change the dynamics of energy flow and contribute to the security
of energy supply in Asia and the Russian Far East," he said. Mikio
Sasaki, President and Chief Executive Officer of Mitsubishi
Corporation, which has a holding of 20-percent, said the project
would establish an important new trade partnership between Russia
Before the green light could be given, some legal framework
issues had to be resolved. Prime Minister Mikhail Kasyanov on May 15
handed over a letter of guarantee from the Russian government to
Shell Chairman Philip Watts. Russian Deputy Prime Minister Viktor
Khristenko was quoted by Bloomberg as saying "the Russian Federation
has taken on obligations and these obligations will be upheld". At
the same time, the State Duma voted to place strict limits on the
number of projects eligible for Production Sharing Agreements (PSAs),
which provide a stable tax regime for foreign investors in Russia,
but said the Sakhalin PSAs would be executed as signed.
Phase two calls for the installation of a new platform on the
Lunskoye field and a second platform on the Piltun-Astokhskoye field
close to the existing Molikpaq platform that has been producing oil
since July 1999. The two fields comprise reserves of 160 million
tonnes of oil (1.2 billion barrels) and 500 billion cubic metres of
natural gas. Lunskoye hydrocarbon production will then be sent via
pipeline to an onshore processing facility, where condensate and oil
will be separated and mixed with the crude oil. Both the oil and gas
will be transported via 850-kilometre oil and gas pipelines to an
oil export terminal and LNG plant in Prigorodnoye at the island’s
southern tip. The LNG is cooled to minus 160 degrees, reducing the
volume 600 times and making it liquid, allowing transportation of
large quantities by tanker ship to customers in different locations.
Sakhalin Energy plans to spend 1.7 billion dollars this year, the
company’s Chief Executive Officer Steve McVeigh said on May 15. The
10-billion Sakhalin-2 project is expected to bring about 45 billion
dollars in value to Russia in the form of taxes and royalties.
Russian companies have already won contracts worth about one billion
dollars for the first phase and Russian contractors are expected to
undertake further contracts worth more than 4.5 billion dollars
during the construction of the second phase. The project will also
involve approximately 300 million dollars worth of upgrades to
Sakhalin’s infrastructure including roads, bridges, railways,
Nogliki airport and Kholmsk port.
This article was published in the Sakhalin Indepent.