# UPDATE FROM SAKHALIN: OIL & GAS PROJECTS FLOW

 

By Michael Allen & Elena Sabirova

 

Russia isabout to make its initial foray into offshore development in the icy Sea ofOkhotsk, which geologists believe could hold the huge gas and oil reservesneeded by booming Northeast Asian economies in the next century. The jumping‑offpoint is the northeast coast of Sakhalin Island, and no less than fivetransnational consortia are in various stages of the pioneering developments.These multibillion-dollar projects are the engines expected to driveopportunities for U.S. companies, not only in the oil and gas industry, but inother areas that should develop as a result of the tremendous amount of foreigninvestment in the region. 

 

Recently, theexpected pace of development of Sakhalin oil and gas projects has slowed as aresult of both internal and external factors—low oil prices, the financialcrisis in Russia, and the need for continued work on production sharingagreement legislation. However, none of the major players have been deterredenough to exit the region. Companies interested in getting involved shouldclosely and regularly monitor changes in development plans. 

 

Leading Offshore Projects

The **Sakhalin‑2** project is the farthest downthe development line, with first oil expected in July 1999. The operator, **Sakhalin Energy Investment Co., Ltd.** (**Marathon**, **Mitsubishi**, **Mitsui**, and **Royal/Dutch Shell**), was the first tosign a production sharing agreement (PSA) with the Russian Government, and thefirst to declare commerciality on a Sakhalin shelf project.  

 

**Sakhalin‑1** (**Exxon**, Japanese consortium **Sodeco**,**Rosneft,**and **Rosneft‑Sakhalinmorneftegaz (SMNG)**) signed a PSA not long afterSakhalin Energy. The two werepoised to become pipeline partnersuntil Exxon drilled a dry hole in the Arkutun‑Dagi offshore field in summer1997, finding a much more complicated reserve structure than previouslysupposed. That, combined with better‑than‑expected 3‑D seismic results from theChayvo field, has gradually changed Sakhalin‑1’s focus toward a longer term gasproject. (Exxon is expected to drill an appraisal well in Chayvo this summer toconfirm.) 

 

This shift in focus changes offshore development dynamicsradically because of the significant difference between the two consortia intheir approach to gas marketing. Sakhalin‑2 shareholder Shell is a world leaderin LNG (liquid natural gas) and tanker technology, while Sakhalin‑1 talks ofsending gas by pipeline to north China and/or Japan’s West Coast. The firstproject to find a willing gas buyer and sign a long‑term contract will clearlybe in the lead on pipeline and production infrastructure development. Exxon hasalready announced formation of a company to do a feasibility study of the Japanundersea pipeline option.

 

Mergers

The recent merger of Exxon and **Mobil**may provide Sakhalin‑1 with a new strategic ally: the **Pegastar**consortium (Mobil, **Texaco**, and **Rosneft‑SMNG**), which will have rights to the Kirin block of **Sakhalin‑3**, an unexplored butpotentially enormous gas field. A bill granting Sakhalin‑3 the right toconclude a PSA sailed through the Duma in April. 

 

Mergers will play a role in the future of two other projects:**Sakhalin‑4** (**ARCO**and Rosneft‑SMNG) and **Sakhalin‑5**(**BP‑Amoco** and Rosneft‑SMNG). Despitehigh hopes for a fast start, the Sakhalin‑4 partners failed to agree on a jointappraisal-drilling program for summer 1999. Sakhalin-5 is still in thediscussion stage. However, an agreed merger of ARCO and BP‑Amoco could changethe situation. 

 

Opportunities on Sakhalin

Despite shifts in strategy and slower development timelines,there is sufficient activity in the region to warrant a close look.Opportunities can be found directly in the oil and gas industry, such as inoil/gas support services, drilling, and camp catering. With virtually noinfrastructure in place on Sakhalin, engineering, construction, and a widevariety of other services are also needed to support the Sakhalin projects andthe expatriate community. Additionally, as projects declare commerciality, theywill begin making promised bonus payments to the Sakhalin regional budget.These funds will be used for much-needed infrastructure development. 

 

 The Sakhalin oiland gas projects have committed to a high level of Russian content in theirdevelopment. Successful U.S. companies here have already discovered that jointventuring with a Russian partner gives them an enormous competitive advantagein gaining contracts and obtaining local permits. Experienced Russia hands (andthe oil companies) know that the process of partnering, training, and proving ajoint venture’s reliability takes time and commitment. Some companies arepartnering with Russian firms now to seek work on infrastructure or otherprojects, if only to gain experience and position themselves now for prequalificationon later oil and gas work, expected two and three years down the road.

 

Sakhalin also boasts opportunities for U.S. companies in theareas of fishing, fishing vessel leasing, fish processing; timber and timberprocessing; and adventure tourism. 

 

*The**American Business Center Yuzhno‑Sakhalinsk**(ABC) assists U.S. companies in surveying the market for their product orservice, identifies opportunities and key contacts, and provides other businesssupport services as the opportunity develops into a contract or ongoing jointventure relationship. In Russia, contact the ABC by telephone at +7 (4242)72‑71‑24,or by email at [email protected]. In the United States, call 206‑443‑1935 orwrite [email protected].*

 

*Formore information on Sakhalin, visit **BISNISOnline** at www.mac.doc.gov/bisnis/country/regions.html#FarEast.*

 

*MichaelAllen in Director of the **AmericanBusiness Center** in Yuzhno-Sakhalinsk.*

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*ElenaSabirova represents **BISNIS** inYuzhno-Sakhalinsk, and is collocated with the American Business Center.*