The Giant Sakhalin II Project Goes Ahead

The project on the Russian Sakhalin II Island in the Pacific shelf is the largest foreign direct investment in Russia so far. Phase one of the project started in 1999 and has successfully produces oil from the Vityaz complex. In 2002 10.77 million barrels of oil could be exported. This week, Sakhalin II Energy announced that the project will be proceeded further which means additional investments of up to $10 billon. Sakhalin II should become the worldwide biggest integrated oil and gas projects, including the construction of a liquefied natural gas (LNG) plant with a capacity of up to 9.6 million tones per year.

The key features of the project are astonishing. The two fields contain reserves of approximately 1.2 billion barrels (160 million tones) of crude oil and 500 billion cubic meters of natural gas. Additional to the LNG plant, there will be two off-shore platforms, as well as 850 km pipelines.

Sakhalin II Energy is lead by Royal Dutch/Shell. The company owns 55 percent stake in the project. Further participants are the Japanese Mitsui with 25 percent and Mitsubishi with 20 percent. Korea Gas is also interested to join the consortium, as well as Gazprom. The Russian gas company was invited to the project but did not officially respond. It is said that the Gazprom wanted a too big stake in Sakhalin II.

The decision to go ahead with the investment was heavily determined by the fact that the first customers could be acquired. Last week, Tokyo Gas signed an agreement to buy liquefied natural gas (LNG) from Sakhalin II Energy. Under the terms of the contract, Tokyo Gas will buy annually up to 1.1 million tons per year of Sakhalin II LNG between 2007 and 2031. This allows the Japanese company to diversify its gas imports and to cut procurement costs.

Just one day later, a second deal with another Japanese company could be signed. Tokyo Electric Power Co. will buy 1.2 million metric tons per year of the project's liquefied natural gas (LNG) for 22 years, starting in 2007.

With its geographical location, Sakhalin II is one of the best LNG projects to supply South Asian countries. There will be lower shipping costs as it is situated only 1,785 kilometers from Tokyo compared with 12,000 kilometers that separates Japan's capital from Qatar's Ras Laffan or 6,800 kilometers from Australia's Withnell Bay. With Japan?s well-known desire to diversify its energy supplies, it is likely that Sakhalin II will find further Japanese customers. It should also be a good alternative for the Chinese and South Korean market, especially if Korea Gas would join the consortium.

This project is the first Russian gas export to Asia and will contribute significantly to Asian and Russian Fare East energy security. This will lead to more political and economical cooperation and could pave the way for example to find a final solution for the Kurile Islands off Japan. This issue has complicated the Russian Japan relations for decades.

Sakhalin is also considered to generate $ 45 billion for the Russian Federation. 70 percent of the required materials to complete the project will come from the Russian economy and will create 110?000 man-years of employment for Russian nationals during the project life.



Author: Andreas Wild