Oil Production Launched at Russia?s Sakhalin-1 Field

Russia?s massive Sakhalin-1 oil and gas field started pumping oil off the country?s Pacific coast at the weekend, the leader of the project Exxon Mobil corporation said on Sunday.

?Production from the Chayvo field has commenced,? Steve Terni, president of Exxon Neftegaz Ltd, the operator of the field with a 30-percent stake in the venture, said. ?This is one of three fields to be developed by the Sakhalin-1 consortium,? he told a news conference.

The Sakhalin-1 project is one of the largest single foreign investments ever made in Russia, and about $12.8 billion is expected to be committed to developing the three fields over a lifetime spanning about 40 years, the Reuters news agency reports. The field is also expected to yield $40 billion in revenues for the Russian government over the coming decade. Initial production from Sakhalin-1, which will rise to about 50,000 barrels a day by year end, will be sold on the Russian domestic market.

Sakhalin lies off Russia?s Pacific coast and is just north of Japan, which occupied half of the island from 1905-1945. Output from the Chayvo field is expected to rise to full capacity of 250,000 barrels per day by the end of 2006 when a pipeline linking the island to an export terminal in the Russian mainland sea port of Dekastri will also allow shipments to international markets.

Gas production from the field starting at about 1.7 million cubic meters a day and later rising to 7.1 million cubic meters, will also at first be sold only to Russian consumers in the mainland Khabarovsk region bordering China.

Terni said Exxon is holding talks with China on the possibility of supplying it with gas from Sakhalin. That could require construction of a pipeline, which could take up to five years to complete, he said. Exxon had earlier hoped to strike a deal with Japan to deliver gas from the island, he said. But the Japanese market had developed less quickly than anticipated.

Global energy prices have risen sharply over the past year as demand has outstripped supply. The start-up of production from Sakhalin-1 is unlikely, at least initially, to have any impact on a tight global energy market because supplies will only be going to Russian users.

Exxon is operating the world?s biggest land-based drilling rig in Sakhalin, using the so-called ?extended reach? drilling method to burrow under the seabed and tap reserves six miles from shore, as well as using an off-shore platform. ?What it allows us is to more cost effectively recover the reserves,? said Terni. ?And being able to drill on-shore is more environmentally friendly.?

But Terni said he did not expect the technique to make it possible to increase production beyond 250,000 barrels per day. Exxon did not expect any significant cost overruns after Royal Dutch/Shell announced in July that costs of its huge Sakhalin-2 gas project would nearly double to $20 billion.