Posted on 12/29/2003 11:54:03 PM PST by RussianConservative
These words were written by Anton Chekhov, who visited Sakhalin, the "Russian Australia," the remote land where convicts were sent, in 1890. That was long before the huge oil and gas deposits were discovered on the Sakhalin shelf. As irony would have it, the fantastic mineral wealth was discovered in that unsuitable upper third of the island that was not counted.
The oil and gas deposits that went on to become part of the production-sharing ventures Sakhalin-1 and Sakhalin-2 were discovered during the Soviet years: Odopto (1977), Chaivo (1979), Lunskoye (1984), Piltun-Astokhskoye (1986) and Arktun-Daginskoye (1989). But there was no industrial oil production at any of these deposits until 1999, when oil production began at the Astokhskoye deposit.
The huge investments required, lack of a legal framework, political instability in the country and frequently changing participants in the consortiums froze the projects. McDermott and Marathon Oil pulled out of the Sakhalin-2 project after the production-sharing agreement (PSA) had already been signed, and Rosneft was forced to sell half its shares in Sakhalin-1 to the Indian Oil and Natural Gas Corp.
In the end, the federal government and the Sakhalin Oblast administration finally signed a PSA for the Sakhalin-1 project June 30, 1995. The project was declared profitable only six years later, on Oct. 29, 2001, and oil production still has not begun.
Sakhalin-2 developed a little faster but, nonetheless, five years passed from the moment Russia’s first PSA was signed June 24, 1994, to production of the first oil. Even when production did finally get under way, volumes were low. In 2002, the Sakhalin-2 project produced only 1.5 million tons of oil.
In the mid-1990s, the Sakhalin projects looked to many like the country’s best hope for prosperity, but they gradually became seen as no more than failed experiments. Critics grow harsher in tone with every passing year, and the attitude toward PSAs has become steadily more negative. Agreements for the Sakhalin-3, -4 and -5 projects, which were to have involved Mobil, Texaco, Exxon and British Petroleum, were never signed.
Attitudes toward already operating projects have also grown more negative. Accusations against the companies involved in the projects range from not respecting agreed-upon deadlines for beginning oil production to not taking sufficient environmental-protection measures.
Environmentalists have called on oil companies to abandon underground oil pipelines in favor of more modern ones built above the surface on supports designed to prevent pipeline ruptures and oil spills during the earthquakes that frequently rock Sakhalin. They also want companies to stop transporting oil across the ice in the Tatar Strait in winter, an end to industrial-waste dumping from the Molikpak platform in the Astokhskoye deposit area, changes to the proposed route for the planned gas pipeline to Japan and greater liability for oil spills at sea.
An appeal signed by representatives of 50 environmental-protection organizations says that "the environmental organizations believe that, until the oil companies agree to these minimal demands, the federal and regional authorities should not let the Sakhalin-1 and Sakhalin-2 projects go any further and that they should not get support from national and international financial institutions, consumers or other interested parties."
There is also dissatisfaction in Sakhalin itself. In November 2002, Anatoly Chyorny, deputy chairman of the Sakhalin Oblast Duma’s Economic Policy Commission, says that Russia might well never see any real revenue from the Sakhalin-2 project. Chyorny cites terms of the agreement stating that until the project reaches a certain profitability level, the investor has the right to take up to 100 percent of all the oil produced to cover the expenses.
As long as investors have the right to all the oil, it is in their interests not to increase oil production, but to keep expenses at a high level. The project agreement contains no fixed list of expenses investors can receive compensation for, and this has created a situation where, Chyorny says, even the sand used in building houses for foreign specialists was brought to Sakhalin from abroad.
"With this approach, all the reserves in the Piltun-Astokhskoye oil deposit might not be enough even just to settle with the investor," Chyorny said.
The main argument against PSAs was that the foreign companies in Sakhalin are not keeping to the rule that 70 percent of the project-related work orders should go to Russian companies. In reality, Russian companies were getting from 20-50 percent of the orders, which caused much anger among the country’s machine-building and pipe-making companies.
Also decisive was the dissolution of the biggest Russian oil producers, led by Yukos, which united all those dissatisfied with the PSA arrangements and forced the authorities to listen to them. As a result, the federal authorities have dramatically changed their position on PSAs in the last three years.
In September 2000, President Vladimir Putin called PSAs "one of our investment-policy priorities." But, by February 2003, Prime Minister Mikhail Kasyanov was saying categorically that "development of new deposits in Russia should be based on the national tax regime." Rosneft, traditionally close to the state in its interests, managed only to defend the possibility of concluding PSAs for the shelf projects that include the as-yet-undeveloped deposits on the Sakhalin shelf.
The state authorities’ tougher stance has forced the companies working on the Sakhalin shelf to finally get more active. The Sakhalin-1 project, which had been lagging in its development, is now forging ahead. In April 2003, three years after the project was declared profitable, state representatives have approved the consortium’s proposed program of work and estimates of expenses for development and production. On July 12, Exxon Neftegaz announced that drilling had begun in the Chaivo area on the northeast coast of the island. Oil production from the Yastreb platform installed in the area is scheduled to begin in 2005 and should produce up to 250,000 barrels a day.
The consortium has also begun to place more orders with Russian companies. Since November 2002, orders have gone to Vyksunsky Steelworks (pipes), Baltic Construction Co. (reconstruction of the Okha-Nogliky road), Far East Shipping Co. (chartering an icebreaker), joint venture Sakhalinmorneftemontazh Alaska Projects (construction of coastal facilities in Chaivo and Odoptu), Vostok Airlines (transport of freight and passengers) and Sovkomflot and Primorye Shipping Co.’s (transport of crude oil). The contracts that have gone to Russian companies over these last few months come to a total of more than $2 billion.
"We are proud that this project is bringing considerable benefits to the Russian economy," said Neil Duffin, the head of Exxon Neftegaz. Duffin did not divulge any details of the meeting he had just had with Kasyanov or of the meeting with Putin that preceded it. But he says that he hopes that the company’s change of policy would enable it to get the project’s terms of reference approved by the end of 2003.
The Sakhalin-2 project’s development has also picked up speed. Sakhalin Energy announced in July that oil produced at the Molikpak platform in the Astokhskoye area would be delivered to a broader range of customers. For the first time since 1999, the company began supplying oil to refineries in the Philippines and the West Coast of the United States. But, overall, oil is now playing a secondary role for Sakhalin-2. Sakhalin Energy has planned to cut oil production by more than 1 million barrels in 2003. The consortium’s founders now have their eyes on the so-far-inactive Lunskoye gas deposit.
Sakhalin Energy did not get involved in gas production because it couldn’t find the kind of demand it wanted. Selling gas to the Russian Far East was not an option, as the directors of Shell and the Japanese companies involved in the project said that gas sales at internal Russian prices would not offset the $8.6 billion needed to develop the Lunskoye deposit. But, seven years after the PSA was signed, the situation has changed.
By the end of July, Sakhalin Energy signed agreements to deliver liquified natural gas (LNG) to three Japanese companies – Tokyo Gas, Tokyo Electric and Kyushu Electric. The agreements are for a total of more than 2.8 million tons of LNG a year, which has enabled the consortium to begin work on building Russia’s first LNG-production facility with a capacity of 9.6 million tons a year. The first LNG deliveries to Japan are expected to begin in 2007. By that time, Sakhalin Energy hopes to have found new customers as well.
‘We would not have announced the beginning of the implementation of phase 2 of the Sakhalin-2 project if we weren’t sure of having a market for the gas we produce," said Chairman of the managing directors’ committee of Royal Dutch Shell Philip Watts.
Some of the gas produced by the Sakhalin-2 project will be supplied to the Russian regions. According to Deputy Prime Minister Viktor Khristenko, Russia’s share of the gas produced in 2006-2010 will be around 1 billion cubic meters a year, and this will increase to up to 3 billion cubic meters a year in 2012-2025. The Russian Far East needs gas, and Khristenko said it may be possible that the consortium will pay its share of the profits to Russia in kind.
Russia will make additional revenues from the project-related orders going to Russian companies. When they announced the start of the Sakhalin-2 projects second stage in mid-May 2003, Sakhalin Energy’s shareholders (Shell, Mitsui and Mitsubishi) promised to invest $10 billion in the project through to 2007 and considerably increase the share of orders going to Russian companies. The project’s largest contract so far was signed on July 30, 2003, between the consortium, Russian companies Starstroi and LUKoil-Neftegazstroi and European companies Saipem SA and AMEC Spie Capaq. The contract, for the design and construction of two 800 kilometer pipelines crossing the whole of Sakhalin from north to south, is worth $1.2 billion.
"The terms of the production-sharing agreement [PSA] oblige us to do everything possible to meet the 70 percent Russian participation level, calculated by the amount of materials, equipment and labor expense used, and I am pleased to be able to say that we are close to reaching this objective," said Steve Macveigh, executive director of Sakhalin Energy.
The Russian authorities have reacted very positively to the PSA-project companies’ change of policy and have even promised to leave Sakhalin-1 and -2 outside Gazprom’s zone of influence. (Gazprom is to co-ordinate development of all eastern Siberian, Far East gas deposits and gas exports to the Asia-Pacific region.)
"Rumors about the demise of PSAs are exaggerated, and today’s event is the best confirmation of that. For Russia, this is a very important day," Khristenko said at a press conference marking the start of phase 2 of the Sakhalin-2 project.
In this way, the companies working on the Sakhalin shelf were able to reach a mutually beneficial compromise with the authorities. The companies have ensured themselves against any possible revision of the agreements they signed or increase of the taxes they have to pay and have also kept hold of the right to conclude new production sharing agreements for the other Sakhalin projects.
The authorities, for their part, have ensured more revenue for the budget and greater participation for Russian companies, which will bring in more taxes and create new jobs. They have also worked out an at-least-partial solution to the Russian Far East’s energy needs through Sakhalin gas.
The battle over PSAs is now over, and work is beginning. This means that Sakhalin might finally have the chance now to transform itself from a remote and neglected region into a real island of treasures.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.