Sakhalin-II

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The Sakhalin II (Сахалин-2) project, like its sister project Sakhalin-I, is a consortium created to locate and produce oil and gas on Sakhalin Island and immediately offshore, in the Sea of Okhotsk, from two fields: Piltun-Astokhskoye and Lunskoye. Piltun-Astokhskoye is primarily an oil field, and Lunskoye is primarily a gas field. The project has been met with heavy criticism over the potential environmental impact, which could include driving the world's last 100 remaining western pacific grey whales to extinction.

Marathon, McDermott and Mitsui formed MMM Consortium in 1991, Shell and Mitsubishi joined in 1992, to make it MMMMS. The consortium formed Sakhalin Energy Investment Company Ltd. (Sakhalin Energy) in April 1994 to develop and manage the Sakhalin II project.

The first ever Production Sharing Agreement (PSA) was completed with Russia in 1994, with the signing of the Sakhalin II project consortium. The consortium is managed and operated by Sakhalin Energy Investment Company Ltd. (Sakhalin Energy). McDermott sold its share to the other partners in 1997, and in 2000 Marathon traded its share to Shell for other properties (the BP operated Foinaven field, near the Shetland Islands, and an eight block area in the Gulf of Mexico-including: the Ursa field) and Marathon’s expenses in Sakhalin-II for that year.

In the Piltun-Astokhskoye field in July of 1999 production began from the Molikpaq platform, Vityaz Complex, and in September of 1999 the first crude was exported.

Contents 1 Consortium partners 2 LNG 3 Oil export terminal 4 Platforms 5 Onshore processing facility 6 Pipeline 7 Offshore pipelines 8 Infrastructure upgrade projects 9 Environmental impacts 10 Recent developments 11 References 12 External links

[edit] Consortium partners

• 55% - Shell Sakhalin Holdings B.V. (Shell - UK/NETHERLANDS)
• 25% - Mitsui Sakhalin Holdings B.V. (Mitsui - JAPAN)
• 20% - Diamond Gas Sakhalin (Division of Mitsubishi - JAPAN)

New agreed distribution of shares are:

• 50% - Gazprom
• 27.5% - Shell
• 12.5% - Mitsui
• 10% - Mitsubishi

The two field total project cost until 2014 was originally estimated by Shell to be between $9 and $11 billion US dollars. However, the costs turned out to be substantially underestimated and in July 2005 Shell revised the estimate upwards to $20 billion, causing much consternation among analysts and Russian business partners alike. There are six main phases to the project: field development in the Piltun-Astokhskoye oil field, field development in the Lunskoye gas field, upgrading infrastructure on the island (IUP — Infrastructure Upgrade Project) which includes building a pipeline to Prigorodnoye on Aniva Bay, building an onshore processing facility (OPF), building an oil export terminal (OET), and building a liquid natural gas (LNG) plant and terminal.

The two fields contain an estimated 1.2 billion barrels (190,000,000 m³) of crude oil and 500 billion cubic meters (18 trillion cubic feet) of natural gas, 9.6 million tonnes of liquefied natural gas a year and about 180,000 barrels per day (29,000 m³/d) of oil will be produced.

[edit] LNG

This will be the first ever LNG plant built in Russia. Shell estimates that the LNG plant will have the ability to meet eight percent of the world’s current LNG demand, 9.6 million tonnes of LNG per year, at the new plant, which will be in Prigorodnoye (Prigorodnoe) on Aniva Bay on the southern tip of Sakhalin, 13 kilometers east of Korsakov, on 4.9 km². Two trains will have an annual capacity of 4.8 million tones each. ^{[citations needed]}

The LNG plant will have two LNG storage tanks of 100,000 cubic meter net capacity each and LNG will be exported via an 805-metre jetty in Aniva Bay. The jetty will have two loading arms and one boil-off gas return arm, with ship loading expected to take between six and sixteen hours depending on the size of the cargo. ^{[citations needed]}

An important step for the project has been to have LNG contracts in place with major customers. The first shipments of LNG are projected to be summer of 2007. ^{[citations needed]}

So far Sakhalin Energy has signed up three LNG agreements: ^{[citations needed]}

• Tokyo Gas : 1.1 million t/year - 24 years (May 2003)
• Tokyo Electric Power Company: 1.5 million t/year - 22 years (May 2003)
• Kyushu Electric Power Company: 0.5 million t/year - 21 years (2003).

The LNG plant construction consortium is awarded to two Russian companies, OAO Nipigaspererabothka (Nipigas) and the KhimEnergo consortium, together with two Japanese companies Chiyoda Corporation and Toyo Engineering. ^{[citations needed]}

[edit] Oil export terminal

Located on Aniva Bay, 500 meters east of the LNG plant, its total storage capacity will be 1.2 million barrels (190,000 m³) in two tanks (about six days pipeline throughput). A underwater pipeline to a tanker-loading unit (TLU), which is located about five kilometers offshore in the bay can load oil at a rate of 50,000 barrels per hour (8,000 m³/h).

[edit] Platforms

• The Molikpaq Platform (PA-A)
  • Originally a drilling rig from Arctic Canadian waters
  • Built to operate in severe ice conditions
  • 16 km offshore
  • 120 m wide
  • Weight 37,523 t
  • 150 personnel
  • Ballast 278,000 m³ sand
  • Temperatures offshore: down to -70 °C wind chill

• Piltun Astokhskoye Platform (PA-B)
  • Four legged concrete gravity substructure engineered and constructed by Aker Kværner Technology AS and Quattrogemini OY
  • Topsides designed by AMEC, construction by Samsung Heavy Industries. At 28,000 tonnes, one of the largest floatover installations ever.
  • Construction began - 4Q 2003
  • Start of production expected – 4Q 2007
  • Water depth 32 m
  • Living quarters for 100 permanent & 40 temporary personal
  • Capacity:
    • Oil approximately 70,000 barrel/d (11,000 m³/d)
    • Associated gas 100,000,000 ft³/d (2,800,000 m³/d)

• Lunskoye Platform (LUN-A)
  • Four legged concrete gravity substructure engineered and constructed by Aker Kvaerner Technology AS and Quattrogemini OY
  • Topsides designed by AMEC, construction by Samsung Heavy Industries
  • Construction began - 3Q 2003
  • Start of production expected – 1Q 2007
  • 15 km offshore
  • Water depth 48 m
  • 90 permanent & 36 temporary personel
  • Capacity:
    • Gas approximately 52 million m³/d (1,800,000,000 ft³/d)
    • Peak liquids and condensate about 8,000 m³/d (34,000 barrel/d)
    • Peak oil 2,500 m³/d (16,000 barrel/d)

[edit] Onshore processing facility

• 7 km inland inline with Lunskoye
• Construction: BETS joint venture:
  • Technostroyexport (Russia)
  • Enka (Turkey)
  • Bechtel (US)
• Cost: $250 million (US)
• Construction commenced 2nd half 2003
• Production start-up - Q4 2005 to Q4 2006.
• 100 MW power plant
• Capacity
  • Gas: 1,800 million standard cubic feet per day (51,000,000 m³/d)
  • Condensate/oil: 60,000 barrels per day (9,500 m³/d)

[edit] Pipeline

Phase two in the project is the construction of two 800 km pipeline systems from the fields on the northeastern edge of the island to a Liquefied Natural Gas (LNG) and an Oil Export Terminal (OET) at the south end. The $1.2 billion (US Dollars) pipeline was awarded to a consortium of two Russian companies Starstroi and LUKoil-Neftegazstroi together with two European companies Saipem SA and AMEC Spie Capag. The project is estimated to employ between 5,000 and 6,000 people from design to completion in December 2006.

• Stats:
  • 126 km of swamp crossings
  • 110 km over mountainous routes
  • 1,000-plus (mainly small) river crossings
  • 18 rail crossings
  • 10 road crossings.
  • Trench buried (with 0.8 to 1 m cover on top of pipe)
  • Block valves: 51 gas; 108 oil; 6 multiphase (all remotely operated)

[edit] Offshore pipelines

• Total overall length - 165 km
  • Two 42 km x 356 mm pipelines from Piltun-Astokhskoye B platform (PA-B) to shore.
  • Two 17.5 km x 356 mm pipelines from Piltun-Astokhskoye A platform (PA-A or Molikpaq) to shore.
  • Two 13.5 km x 114 mm pipelines from Lunskoye Platform (LUN-A) to the shore.
  • One 13.5 km x 762 mm pipeline from shore to LUN-A to provide gas to the facility.
  • One 5.5 km x 752 mm tanker loading line from the OET (Oil Export Terminal) to the TLU (Tanker Loading Unit) in Aniva Bay.

[edit] Infrastructure upgrade projects

Sakhalin II will create permanent work for up to 2,400 people and jobs for an estimated 10,500 more during the construction period. Together with Sakhalin-I, unemployment should remain low and island improvements greatly expanded. To complete the plants and pipeline, Sakhalin Energy will spend $300 million (US) to upgrade the islands infrastructure: roads, bridges, waste management sites, airports (including one at Nogliki), railways and ports, at more than 50 construction sites.

• Sakhalin Western Marine Port: To allow for the inbound receipt of Phase 2 construction materials including pipeline and Onshore Processing Facility cargo, the Port of Kholmsk, on the southwest part of the island, has been upgraded. Work includes: dredging works, quayside works, installation of rail sidings, access roads, 4 x 20 t and 1 x 32 t gantry cranes erected, Berth 5 has been refurbished, final works at the port including office and warehouse upgrades are currently ongoing.
• Federal Roads and Bridges: 39 bridges & bridge approaches, bridge and culvert construction, 16 km of federal roads are being reconstructed, and a further 12 km of federal carriageway is being asphalted.
• Onshore Processing Facility (OPF) Site Works: Temporary site works at the Onshore Processing Facility (OPF) site, including construction of an 115,000 m² Site Construction Camp Area and a 70,000 m² Temporary Works Area, 6 km Beach Access Road (BAR) and an 11,000 m² Beach Laydown Area (BLA) at near-by Lunskoye beach.
• Onshore Processing Facility Southern Access Road (SAR): 76 km of access roads to the OPF facility. Including the SAR (0-57 km) project, involving redesigning and upgrading 57 km of road including 13 bridges, the SAR (57 to 76 km), involves the construction of 20 km of new road.
• Railways: Railway upgrades, 9 separate rail sidings, and 2 new passing loops on the main line (west coast).
• Phase 2 Project Office: 250-person, 3-story project office facility in Yuzhno-Sakhalinsk
• Phase 2 Accommodation Facility: 13 two-story apartment buildings (104 units), accommodation facilities near Zima Highlands, a multi-use recreation facility, a mechanical and electrical building and a free-standing security building.
• LNG Site Works: general site clearance, archaeological works, demolition works and the removal of submarine cables from Aniva Bay.
• Municipal Works: Road and bridge upgrades for 7 Island’s Municipalities: Dolinsk, Kholmsk, Korsakov, Makarov, Nogliki, Poronaysk and Yuzhno-Sakhalinsk.

[edit] Environmental impacts

The project has been dogged by environmental and social criticism and opposition from numerous environmental groups including Sakhalin Environment Watch, World Wide Fund for Nature, Friends of the Earth, Bankwatch, Pacific Environment, IUCN, as well as from residents of Sakhalin and independent scientists.

One key concern is that the project will push the world's last 100 or so Western Pacific grey whales into extinction, according to several NGOs'^{[attribution needed]} interpretation of an International Scientific Review Panel (ISRP) report.^{[citation needed]}

Other concerns are that the project will threaten the livelihood of tens of thousands of fishermen, destroy the key salmon fishing area off the island by dumping one million tons of dredging spoil waste into the sea, and imply a long-time threat of a large oil spill in the Okhotsk and Japanese seas.^[1]

The key NGOs demands in this regard are:

• Pipeline crossings across all spawning rivers and streams on Sakhalin Island must be made with a bridge over the river, on specially designed suspension systems, to avoid damage to the streambed and water channels.
• The new proposed platform for the Piltun-Astokhskoye field for Sakhalin-2 Phase 2 should be moved at least 12 nautical miles from shore in order to ensure that the platform does not harm the habitat of the critically endangered western grey whale.
• Discharge of any wastes into Aniva Bay should not be allowed.
• Shell, Mitsubishi, Mitsui and Gazprom, must take full financial liability for any oil spill within Russia (including Aniva Bay and the La Peruse strait) from tankers and compensate all expenses for liquidating and cleaning polluted areas, and pay compensation to injured people. The international financial institutions should financially guarantee that the cleanup funding and compensation is available immediately after the accident.^[1]

Criticism has also come from other sides. In 2003, the European Bank for Reconstruction and Development, a potential financier of the project deemed Sakhalin-II 'unfit for purpose' due to environmental concerns.^{[citation needed]} The project, many argued, was in direct violation of the Equator Principles, a set of voluntarily guidelines adopted by the world’s leading banks, and a number of Equator Principles banks have already indicated that they will not fund Sakhalin II.

Shell has responded to these concerns saying that the project meets lenders' policies and that environmental and that social issues have been met.

In the summer of 2005 Sakhalin Energy, the project operator, doubled its estimated capital costs to around $20 billion and LNG production was delayed until 2008.^{[citation needed]} Shell expressed surprise at this huge increase. Environmental reasons accounted for part of the budgetary errors. Pipeline routes from the platforms to the island had to be changed to avoid the feeding grounds of an endangered species of whale and redesign was needed to prevent the onshore pipelines from damaging the environment. The local community on the island has protested about damage to fishing and to reindeer herding, their most important economic activities.

The environmental and social concerns came to a head at the end of November 2005 when the Chief Executive of WWF, Robert Napier, said that it would have a "negative impact on Sakhalin's people and environment". The timing of this attack was difficult for Shell and the other consortium partners as they were seeking financing for the project from the European Bank for Reconstruction and Development (EBRD) at that time. WWF has asserted that Sakhalin-2 threatens marine life as well as potentially damaging the local communities in the region. The EBRD is required to adhere to the "Equator Principles" that require all lendings it makes to meet ethical guidelines. Shell has commented on WWF's assertion by saying that the project meets lenders' policies and that environmental and social issues have been met.^[2]

In September 2006, Oleg Mitvol, the deputy head of the Russian Federal Service for the Oversight of Natural Resources, called for construction work to be halted and threatened to revoke environmental authorisation for Sakhalin II pipeline installation. The grounds given for the possible revocation included alleged negligent installation work, safety breaches and violation of the pipeline route plan. Mitvol alleged that damage already caused to the environment would cost $50 billion to repair. The move was supported by President Putin, said to be furious that the estimated project cost had doubled to $20 billion. The increased cost will delay the date that revenues flow to the state under a Production Sharing Agreement (PSA). NGOs concerned about the impact of the project on the endangered Western Gray Whale population supported a related re-evaluation process by the Russian environmental ministry. Energy analysts believe alleged violations of the permit are in fact a pretext by the Russian government to pressure Sakhalin Energy to sell a large stake to the state gas monopoly, Gazprom. It is also possible that Russia wishes to renegotiate the PSA. The uncertainty generated by Russian ministry announcements and comments attributed to President Putin has created an international furore with high level protests from many governments, including the USA, the UK and Japan. The EBRD has put back a decision on project funding pending clarification of the situation, including a threat by the Russian authorities to launch legal proceedings against Sakhalin Energy.

The spiralling project costs have continued to undermine confidence in Shell's reputation for project manangement. On 22 October 2006 an article in The Observer reported that a leaked internal report by the Russian government estimated that the final cost would now reach $28 billion. Alfred Donovan and his son John Donovan, the owners of a website Royaldutchshellplc.com outspokenly critical of Shell management, claim to have supplied important information to the Russian government since September 2005 concerning Sakhalin II project costs and environmental issuesincluding leaked internal correspondence between senior Shell managers. Recipients of the information purportedly include Oleg Mitvol, the aforementioned Deputy Head of RosPrirodNadzor, vividly described in a Guardian newspaper article as a “Kremlin attack dog” - “6ft 2in and dressed in a black coat”.

In November 2006, Oleg Mitvol confirmed in an interview published in "This Week in Argus FSU Energy", that the evidence on which a prosecution against Sakhalin Energy claiming $10 billion in damages was being mounted, was supplied by John Donovan of royaldutchshellplc.com. [1]

An article published by Prospect magazine in February 2007 under the headline: "Rise of the gripe site", provided further insight into the role of John Donovan. The following are extracts: "What most astonished Shell was the detailed inside knowledge Mitvol had accumulated... Some in the company suspected industrial espionage. But it was actually information that the Donovans of Colchester were passing to Mitvol. They say they got this information from Shell insiders. Mitvol clearly trusted the material, and in December he admitted for the first time publicly that his deep throat on Sakhalin was John Donovan."

On 29 March 2007, in an article published by Kommersant under the headline "Russian Authorities Pull Out of Dispute with Sakhalin Energy", Mitvol was quoted as saying that RosPrirodNadzor would not be taking any action in the courts in relation to environmental violations by Sakhalin Energy. The decision was made on the basis that Sakhalin Energy "is willing to solve the problems" which Gazprom would be asked to fund.

[edit] Recent developments

In 2005, Shell agreed to swap 25% of Sakhalin-II to Gazprom, in exchange for 50% of a natural gas field in the Russian Arctic, plus cash. Several days after the deal was signed, Shell doubled its cost estimates for Sakhalin-II to $20 billion. This move is reported to have highly angered Gazprom and the Russian government, since this implied lower potential profits for them.

On September 18, 2006, Russian regulators withdrew an environmental permit for Sakhalin-II, citing damage to salmon streams. This was widely interpreted as a move by the Russian government to force a renegotiation of the Sakhalin-II deal.^[3]

On December 21, 2006, Gazprom took control over a 50%-plus-one-share stake in the project by signing an agreement with Royal Dutch Shell.^[4][5] Russian President Vladimir Putin attended the signing ceremony in Moscow and indicated that environmental issues had been resolved. [2] In a news report on December 23, 2006, The Sunday Telegraph claimed that Shell had been bullied into the deal by the Russian authorities. [3] It subsequently reported that the European Bank for Reconstruction and Development, which had been considering advancing a substantial loan to Sakhalin Energy, would likely "walk away from the Sakhalin-2 energy project in what will be seen as an embarrassing snub to the renationalisation policy of Vladimir Putin, the Russian president." [4] News also emerged that Shell had signed "a secret protocol with the Russian government as part of its deal to sell half of the Sakhalin-2 project to Gazprom." [5]

[edit] References

1. ^ ^{a b} Sakhalin Environment Watch. Sakhalin-II Oil and Gas Project - Introduction. Retrieved on September 20, 2006.
2. ^ Risky Business - the new Shell (PDF). WWF (November 2005). Retrieved on July 23, 2006.
3. ^ Kramer, Andrew E. (2006). "Russian oil reversal stirs outcry". International Herald Tribune. 
4. ^ http://news.bbc.co.uk/2/low/business/6201401.stm
5. ^ http://business.guardian.co.uk/story/0,,1977430,00.html?gusrc=rss&feed=24

[edit] External links

• Sakhalin-2 Project website
• The Sakhalin II Project: Latest News and information @ Shell.com
• Sakhalin Factsheet @ the Department of Energy's Energy Information Administration
• Yuzno.com: Sakhalin Projects News (English)
• Sakhalin Environment Watch An NGO campaigning against the Sakhalin-II
• World Wide Fund for Nature
• Sakhalin II problems postpone liquid gas supplies to the USA