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Deputy chair of the Gazprom governance board Aleksandr Ananenkov takes part in the press briefing headlined 'Extension of Proven Mineral Resources. Natural Gas Production. Development of Gas Transportation System. The briefing was sumnmoned in the run-up to the annual shareholders meeting and held in Gazprom headquarters.
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Nov. 03, 2004
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China Joins the Battle for Sakhalin
// With ExxonMobil's Help
People's Friendship
Officials of Gazprom and ExxonMobil yesterday announced their intentions to cooperate in developing the Sakhalin-1 project. It was also learned yesterday that ExxonMobil and China National Petroleum Corporation (CNPC) have started negotiations on gas deliveries from Sakhalin-1 to China via pipeline. For Gazprom, participation in this project may become an alternative to constructing a gas pipeline from Eastern Siberia to China.

Gazprom's press service reported that Aleksandr Ananenkov, acting CEO of Gazprom (CEO Aleksey Miller is on a short vacation), and Jeffrey Woodbury, president of ExxonMobil's Russia Inc., held a working meeting yesterday. The main topic of discussion was future cooperation of the two companies in the Sakhalin-1 project, where ExxonMobil is the operator. Officially, Gazprom has no shares in Sakhalin-1, but last year the assets of Rosneft, including its 20% share in the Sakhalin project, became part of Gazpromneft.

Until recently, the participation of the Japanese consortium SODECO in the project suggested that gas from Sakhalin-1 would be delivered to Japan either by pipeline or as liquefied natural gas (LNG); however, the Japanese have long had doubts about the project's profitability. The Japanese newspaper Nihon Kenzai reported yesterday that talks were underway between ExxonMobil and CNPC on possible long-term gas deliveries from Sakhalin-1. According to the newspaper report, the two sides discussed the possibility of constructing a gas pipeline from Sakhalin to China at a cost of $9.414.1 billion. ExxonMobil has not commented on this information. Gazprom's press service says that Mr. Ananenkov and Mr. Woodbury discussed the possibility of exporting gas from Sakhalin-1 to countries in the Asia-Pacific region, as well as the inclusion of Sakhalin-1 in the Unified Gas Supply system

We note that at the present time gas reserves in Sakhalin-1 make construction of an expensive pipeline (the pipe to China could cost as much as $14 billion) uneconomic. Nevertheless, gas deliveries from Sakhalin to China are a real possibility.

A SakhalinKhabarovsk pipeline corridor already exists today, although its capacity is an order of magnitude less than potential delivery volumes from Sakhalin-1. Expanding this gas pipeline and completing it along the KhabarovskVladivostokHarbin route could secure entry to the Far Eastern gas market not only for ExxonMobil and Gazprom, but also for other projects on the Sakhalin Shelf.

Sakhalin-1 includes three licensed oil and gas fields (Chayvo, Arktun-Dagi, and Odoptu-More) being developed by a consortium of investors under a production sharing agreement (PSA). ExxonMobil has a 30% share in the Sakhalin-1 project, the Japanese consortium SODECO (Itochi, Maribeni, and JPEC) has another 30%, and the Indian company ONGC and Rosneft have 20% each. Two of the project's fields, Chayvo and Odoptu, have gas reserves of 156.9 billion cu. m (category C2), allowing production levels of up to 20.4 billion cu. m per year; total recoverable oil and condensate reserves (C2) are 165.8 million tons. Total costs under the PSA are $57 billion, gross revenue is $148 billion, and government revenues under the PSA are $40 billion. Oil production is slated to begin in 2006, while the first gas deliveries to Khabarovsk should begin in 2005.

After the addition of Rosneft's assets to Gazpromneft, Gazprom should acquire a share in a number Sakhalin projects, in particular, 51% and operator status in the development of the Vostochno-Shmidtovsky and Kaigansko-Vasyugansky blocks of the Sakhalin-5 project (probable gas reserves of the project block are estimated at 500 billion cu. m), a 33.3% share in exploration of the Kirinsky block of the Sakhalion-3 project (partners in the project are ExxonMobil and ChevronTexaco with 33.3% each; gas reserves are estimated at 720 billion cu. m), and 51% and operator status in the development of the Astrakhanovsky block of the Sakhalin-4 project (90 billion cu. m). TNK-BP is Rosneft's partner in Sakhalin-4 and Sakhalin-5.

Counting its own projects, Rosneft planned to produce up to 20 billion cu. m of gas by 2015. We note that Gazprom is also holding talks with Shell on joining the Sakhalin-2 project with reserves of more than 400 billion cu. m in its main gas field, Lunskoe. And although most of Lunskoe's gas will be sent to LNG plants on south Sakhalin, some of the fuel may be sent to the common pipeline to Vladivostok, which has a capacity of up to 40 billion cu. m of gas. Sakhalin Shelf projects may provide these gas delivery volumes in 20122020. We also note that the hypothetical gas pipeline is comparable in cost to the gas pipeline from Kovykta, and Gazprom would not have to hurry to realize gas projects in Eastern Siberia before 2010.

Of course, this scenario, which seems fantastic today, is probably beyond the power of Gazprom alone it will likely require the formation of a consortium to construct the new pipeline. Potential participants include ExxonMobil, Shell, BP, and Japanese companies. However, talks on this subject are unlikely to begin before 2005.

Dmitry Butrin

All the Article in Russian as of Nov. 03, 2004

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