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Russia stirs up Sakhalin
projects
By Sergei Blagov
MOSCOW - The Russian government has annulled
the results of an international tender for a major oil
and gas project, leaving observers wondering whether
an investment climate change is taking place. The
original Sakhalin-3 tender was won by a consortium led by
the world's largest oil company, ExxonMobil, back in 1993, when
Sakhalin island, north of Japan, was seen as a new hydrocarbon
bonanza in the northern Asia-Pacific region.
Yet according to the decision announced by
Russian Deputy Prime Minister Viktor Khristenko, the
1993 tender won by Exxon and Texaco allowed the
companies to explore offshore fields, but involved no
firm legal guarantees for the eventual development of
Sakhalin-3.
The developers of Sakhalin-3
would be picked through another auction, Khristenko
said, adding that offshore blocks would be offered at an
open tender, even though Exxon had said it was no
longer seeking a production-sharing deal and was ready to tap
it on a regular tax regime.
In 2002,
Russia came close to abandoning the production-sharing system,
which guarantees investors stable taxes over the life span
of a project. Only three advanced
production-sharing agreements (PSA) projects survived, including
Sakhalin-1 and Sakhalin-2, led by Exxon and Royal Dutch Shell
and another in Siberia. A number of other less advanced
PSA plans have been skipped, including Sakhalin-3.
Six Sakhalin offshore blocks have been seen as
potentially among the largest 21st-century energy projects. Sakhalin
crude and natural gas are aimed at nearby Japan, which
is understood to count on Sakhalin to cut its dependence
on oil supplies from the Middle East.
ExxonMobil, which is already operating a US$12
billion project at Sakhalin-1, with a 30 percent stake
in the project, has so far refrained from overtly
critical remarks over the annulment of its Sakhalin-3
tender. However, some of the company's executives
reportedly talked about rights violations and wrong
signals being sent to foreign investors. Sakhalin-1's
potential recoverable resources are 2.3 billion barrels
of oil and 17.3 trillion cubic feet of gas. ExxonMobil
reportedly spent $60 million on Sakhalin-3.
Russian observers and media
expressed little sympathy toward ExxonMobil. Yuri Boldyrev,
an expert with Russia's Audit Chamber, claimed
that ExxonMobil overstated its Sakhalin-3 expenses.
Russian daily Kommersant commented: "Khristenko booted out
the Americans." It is rumored that Sakhalin-3
might eventually end up in hands of Russia's natural-gas
monopoly Gazprom.
Sakhalin-3 consists of three
blocks, Ayashsky, Kirinsky and Odoptinsky, on the shelf
of Sakhalin, with combined estimated reserves 4.6
billion barrels (620 million tons) of oil and 770
billion cubic meters of gas.
ExxonMobil,
ChevronTexaco and Rosneft each have equal stakes in the
Kirinsky block. ExxonMobil controls two-thirds of the
Ayashsky and the East Odoptinsky blocks, while the rest
is held by state-owned Rosneft, which acts as the
government's agent in foreign oil projects in Russia.
Rosneft basically shrugged off the
Sakhalin-3 news. Rosneft is ready for any government
decision, spokesman Dmitry Panteleyev told Asia Times
Online. However, he conceded that in the wake of the
abandoning of the PSA system, Rosneft is recalculating some of
its Sakhalin projects. Rosneft is involved in five out
of the six Sakhalin blocks, potentially among the
largest 21st-century energy projects.
Incidentally, Russia received $6.5 billion in foreign
direct investment (FDI) in 2003, with nearly half of that
total invested in Sakhalin. Moscow expects the country
will receive $8.2 billion in FDI this year, of which at
least one-third is expected to go into Sakhalin.
However, some Sakhalin oil and gas projects
now face a reality check. Last December, Rosneft
announced it would halt work at two oil-exploration blocks. A
joint venture with oil major British Petroleum (BP)
reportedly had poor exploration results on Sakhalin-4,
known as the Astrakhan block. The $2.5 billion project
was previously believed to hold up to 100 billion cubic
meters of gas.
Last month,
Rosneft also announced withdrawal from the Sakhalin-6
block. Rosneft was disappointed by the results of exploration
on this block, which was initially believed to
contain reserves of up to 2.2 billion barrels of oil.
Sakhalin's most successful project to date is Sakhalin-2, led
by Royal Dutch/Shell, which has been producing oil since
1999 and is planning to build the world's
largest liquefied-natural-gas plant by 2006.
On January 23,
the Sakhalin council approved the spending of $2.5
billion this year to expedite the construction of the main
oil and gas pipelines from the north to the south of
the island. The construction of two 800-kilometer pipelines
is due to take two years and $1.2 billion to complete.
The project is grandiose in scale. It involves
the construction of the main pipelines through which oil
and gas will be pumped to the south of the island for
refining and exporting to buyers in the Asia-Pacific
region and beyond, Sakhalin energy chief executive
officer Steve McVeigh is reported as saying.
Another project, Sakhalin-1, led by US
ExxonMobil, plans to produce its first oil in 2005. The
two projects, Sakhalin-1 and Sakhalin-2, are estimated
to require a combined $22 billion in investment.
However, some investors have recently complained
about the high costs of Sakhalin projects. India's ONGC
Videsh Ltd has started an examination of the reasons
behind an $800 million cost overrun in Sakhalin-1. ONGC
has so far invested $920 million in the Sakhalin-1
project in the hope that it would get about 2 million
tons of crude oil each year for 15 years. These concerns
should be addressed by ExxonMobil as the project's
operator, Rosneft's spokesman Panteleyev indicated.
While he recognized the ongoing cost escalation in the
Sakhalin-1 project, Panteleyev argued that the overrun
was "predictable".
Moreover, Rosneft
was reportedly set to ask BP for an extra $5 billion
over the next decade to tap their Sakhalin-5 venture.
In 1998, Rosneft formed an alliance with BP to complete
the Sakhalin-5 project. The deal gave BP 49 percent in
an exploration venture for Sakhalin-5, while
operator Rosneft had 51 percent. The agreement expires this
year. BP reportedly favors a more even split of
development costs, while Rosneft, which holds the
drilling rights, would prefer not to raise its
investment in the projects.
Sakhalin-5 is potentially one of the largest, with oil
and gas condensate output forecast at a maximum exceeding 700,000
barrels per day - close to the output of Organization of
Petroleum Exporting Countries member Qatar. The
hypothetical recoverable reserves of oil amount to 433
million tons. The estimated total cost of the project is
$30 billion, while gross income estimates exceed $100
billion. Rosneft has said it expects Sakhalin-5 to begin
oil output in 2010.
Rosneft declined to confirm
that it had asked BP to finance the entire development
of Sakhalin-5, but says negotiations on how the block
should be financed continue. Meanwhile, Rosneft's
reluctance to raise its own stake in Sakhalin-5 could be
somewhat indicative of the changing investment mood.
(Copyright 2004 Asia Times Online Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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